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POLITICAL ECONOMY, 



SOME LEADING PRINCIPLES 



POLITICAL ECOI^OMY 



NEWLY EXPOUNDED. 



BY 



J. E. CAIRNES, M.A., 

BMEBITT7S PB0FES80B OF POLITICAL ECONOMY IN TINITEKSITY COLLEGE. LONDON. 




NEW YORK: 
HARPER & BROTHERS, PUBLISHERS, 



FKANKLIN SQUARE. 



Aot 

Je.l8'9a 

7 klr'Q2 



PREFACE. 



Though the following work is an attempt to recast some 
considerable portion of Political Economy, I should be sorry 
it were regarded as in any sense antagonistic in its attitude to- 
ward the science built up by the labors of Adam Smith, Mal- 
thus, Eicardo, and Mill. On the contrary, my hope is that it 
will — should its reasonings find acceptance- — strengthen, in 
some sensible degree, and add consistence to that fabric. As 
regards those assumptions respecting human character and the 
physical conditions of external nature which constitute the ul- 
timate premises of economic science, the position I have taken 
is identical with that of the four great writers I have named ; 
and I have endeavored also to follow the method of combined 
deduction and verification by comparison with facts, which was 
theirs, and which is, as I believe, the only fruitful, or indeed 
possible method in economic inquiry. Nor do the final con- 
clusions which I have reached differ very widely on any im- 
portant points from those at which they had arrived. The 
points on which I have ventured to join issue with them are 
what, in Bacon's language, may be called the axioraata media 
of the science — those intermediate principles by means of which 
the detailed results are connected with the higher causes which 
produce them. If I have not deceived myself, there is in this 
portion of Political Economy, as at present generally received, 
no small proportion of faulty material ; and the present work 
may be regarded as an attempt, so far as it goes, to replace this 
element of weakness with matter better fitted to endure the 
strain of modern criticism. 

The nature of the undertaking has brought me, much oft- 
ener than I could have wished, into collision, with more than 
one living writer for whose abilities and acquirementa I feel 

1 



2 PREFACE. 

high respect, and with whose practical aims I not unfrequent- 
\y strongly sympathize ; and in particular I have been com- 
pelled in several parts of the book to express my strong dis- 
sent from some of the views of my fiiend Mr. W. T, Thornton. 
Mr. Thornton, in his work on "Labor," has contributed much, 
for which economists will be grateful, to the elucidation of the 
relations between labor and capital in this country; but he 
has also taken up certain theoretic positions which it seems 
to me are fundamentally erroneous. When my path has lain' 
across these, I have not hesitated to challenge them, using 
here the same freedom which Mr. Thornton has himself em- 
ployed when criticising the views of preceding writers. I 
trust that I have also profited by the example he has set me 
of courtesy toward opponents. 

Though the main purpose of the book is, as I have already 
intimated, to aid the improvement of economic theor}'-, I 
have nevertheless embraced every opportunity that offered of 
bringing theoretic doctrines into comparison with the facts 
presented by modern industry and commerce. I have in this 
way been led to examine the power and pretensions of Trades- 
Unions, the efficacy of Strikes, and other practical questions 
involved in the relations of labor and capital ; and, in the 
portion of the book devoted to International Trade, I have, 
with the same view, considered in some detail the present 
position of the external trade of the United States, as well as 
the system of Protection which, in defiance alike of theory 
and experience, that country has so strangely adopted, 

I can not conclude these remarks without once again grate- 
fully acknowledging my deep obligations to my friend Pro- 
fessor JSTesbitt, who has, both by supervision of the work while 
in progress, and by correction of the proofs as it passed through 
the press, very materially contributed to its now at length be- 
ing brought to a close. 

J. E. Cairnes. 

KiDBROOK Park Eoad, S.E., March, 1874. 



CONTENTS. 



PART I— VALUE. 

CHAPTER I. 

PRELIMINARY. 

Pasr 

S 1. Meaning of Value 11 

Value and price 12 

"A sum of values " 12 

When a chaujie in exchanging relations is described as a rise or fall 
of commodity A, rather than as a fall or rise of commodity B, what 

is meant ? 13 

§ 2. Three problems concerning Value 14 

I. Conditions essential to the existence of value 14 

II. Causes which determine " marlvet values " 14 

III. Causes which determine " normal values " 14 

I 3. Problem I.— Conditions essential to the existence of value 14 

§ 4. Relation of value to utility.— Professor Jevons's theory examined 16 

CHAPTER II. 

SUPPLY AND DEMAND. 

1 1. Fundamental truth in connection with Supply and Demand 22 

§ 2. Analysis of the phenomena 23 

Supply and Demand strictly analogous conceptions 25 

Mr. Mill's criticism on this point unfounded 26 

§3. Demand, as "quantity demanded," occasionally a convenient, but not 

the proper sense of the term 27 

§ 4. Supply and Demand, as aggregates, are strictly interdependent phenom- 
ena, and increase or diminish togetlier 30 

§ 5. Similarly, Production and Consumption are interdependent phenomena. 31 
This doctrine not irreconcilable with the existence of an idle rich class 

who are consumers merely 33 

Case of foreign residents engaged in no industry, but simply expend- 
ing and consuming 35 

§ 6. Supply and Demand, as related to particular commodities 36 

In this sense not interdependent phenomena: either may increase or 

diminish irrespective of the other 36 

What is meapt by the equality or inequality of Supply and Demand?. . 37 

§7, The supply of' a commodity tends to adapt itself to the demand at the 

normal price 41 

CHAPTER III. 

NORMAL VALUE. 

1 1. Nature of Normal Value 43 

§ 2. Current theories, which confine normal value to exchanges governed by 

cost of production, too narrow 45 

Mr. Mill's docrine of Cost of Production 46 

§ 3. Criticism of the received theory 48 

§4. Examples of practical errors resulting from the received Tiew 54 



4 CONTENTS. 

Pagk 

I 5. Statement of the theory of Cost of Production as governing normal value 57 
Effective couipetitiou an indispensable condition in order to the action 

of the ijriuciple of cost 58 

Extent to which effective competition is actually realized in industrial 

communities 60 

Non-competing industrial groups 66 

Compliciition of results 69 

Nature of the law of " cost " 72 

§ 6. Analysis and characterization of the constituents of "cost " 73 

TThe labor element of " cost" 75 

Relation of skill to "cost" and to "value" 76 

Nature of " abstinence" 80 

How far does " abstinence" stand in need of reward '? 81 

The sacrifices involved in cost of production not necessarily under 

gone by distinct persons 83 

In computing cost of production, it is the average sacrifice that is to 

be taken account of 85 

§ 7. Normal value as determined by Reciprocal Demand 87 

Nature of Reciprocal Demand as between nations and non-competing 

industrial groups 91 

Difference in the modes of action of Cost of Production and of Recip- 
rocal Demand 93 

Probable effect of improved popular education on Reciprocal Demand, 

and, through Reciprocal Demand, on normal values, in this country. 95 

CHAPTER IV. 

MAKKET VALUE 

§ 1. Market Value, amenable to law 97 

§ 2. Adam Smith's doctrine of Market Price 98 

§ 3. Mr. Mill's doctrine 101 

§ 4. Proposed theory of Market Price in wholesale markets 104 

Play of forces in the market 106 

" Proper market price " 107 

Function of Speculators 109 

Subordinate importance of the theory 110 

§ 5. Prices in retail markets 113 

Capital in retail trade excessive 114 

Co-operative competition 115 

CHAPTER V. 

ON SOME DERIVATIVE LAWS OF VALUE. 

§ 1, Character of the industry of new communities 117 

Action of the law of "diminishing productiveness" 118 

§ 2. Course of price in meat and timber 119 

§ 3. Course of price in the staple food 123 

§ 4. Reciprocal movements in tillage and pasture 127 

Effects on the progress of rent 127 

§ 5. Course of price in accessory products 128 

§6. Adam Smith's insight 130 

% 7. Course of price in mineral products 131 

§ 8. " " in manufactures 132 

" " in coarse and refined manufactures 135 

§ 9. Derivative laws in fluctuations of the market 135 

510. Laws of fluctuation as affecting manufactures 137 

^11. " " as affecting raw products 141 

" " as affecting the staple food of a people 142 

§ 12. Market fluctuations differ in intensity and in duration 145 

In vegetable products more intense 144 

In animal products of longer duration 144 

Fish and game ^. 145 



CONTENTS. 



PAET IL— LABOR AND CAPITAL. 

CHAPTER I. 

THE BATE OP WAGES. 

Paqr 
§ 1. The problem of relative wages solved by the theory of value, but not that 

of positive wages 149 

§ 3. Reasons for treating apart labor and commodities as subjects of ex- 
change value 150 

§ 3. Are we justified in speaking of a "general" rate of wages? Mr. Longe's 

objection considered 154 

§ 4. Present state of the controversy 157 

§ 5. The Wages-fund theory 159 

§ 6. Positions taken by the disputants on either side 161 

§ 7. Mr. Longe's doctrine that "the demand for commodities determines the 

quantity of wealth spent in tlie wages of laborers " considered 163 

§ 8. Exposition of the Wages-fund tlieory 167 

Causes determining tlie amount of investment 168 

Three leading constituents of capital — Fixed Capital, Raw Material, and 
Wages -fund. Causes determining the proportions in which they 

combine 170 

Mode in which tlie supply of labor affects the amount of the Wages-fund 173 

§ 9. Law of the growth of of the Wages-fund 174 

Social consequences 177 

§ 10. Industrial crises — effects on the Wages-fund 178 

§ 11. Mi\ Thornton's objections to the Wages-fund doctrine considered 180 

CHAPTER II. 

DEMAND FOR COMMODITIES. 

5 1. Two conditions of Demand for Commodities 189 

1. Where, aggregate expenditure remaining the same, a change takes 

place in the direction of demand 189 

3. Where aggregate expenditure, and therefore the aggregate demand 

for commodities, undergoes increase 189 

§ 3. Action on the Wages-fund of changes in the direction of the demand for 

commodities 190 

Where competition is effective 190 

Where competition is not effective 191 

International effects produced by changes in the direction of demand. 193 
§ 3. Action on tlie Wages-fund of an increase in the aggregate demand for 

commodities 194 

§ 4. Summary of results 199 

§ 5. Wages and prices 300 

Incomplete theories 301 

§ 6. Statement of tlie relation between wages and prices 203 

Corresponding movements 304 

§ 7. I. Case of an increase in wages from a growth of capital more rapid tlian 

of population, while the productiveness of industry remains unaltered 305 
§ 8. II. Case of an increase of wages due to improved industrial processes, or 

to an extension of trade 206 

§ 9. III. Case of an increase of wages due to an enlarged supply of money 307 

Principle connecting wages and prices 309 

§ 10. Monetary paradox 310 



6 CONTENTS. 

CHAPTER III. 

TKADES-UNIONISM. — NO. I. 

Pagb 

§ 1. Question of the limitation of the Wages-fund fundamental in Trades- 
Union controversy , 214 

§ 2. Economic limits of the Wages-fund 215 

Law of the teudency of profits to a minimum 216 

Bearing of this on the question of limitation 217 

§ 3. The character of the limitation not such as to exclude Trades-Union action 219 

Proper province for this action 224 

Practical utility of strilves depends upon the ability of leaders to dis- 
criminate states of the market 225 

How far is this ability likely to be acquired 226 

§ 4. The foregoing conclusions applicable to countries in which profits are 

above the minimum ; for example, the United States 230 

§ 5. Recent advance in wages, how far due to Trades-Union action 231 

§ 6. Power of capitalists by combination to control the labor market 233 

§ 7. Relation of wages to profits 235 

Mr. Brassey's doctrine as to the uniform cost of labor examined 238 

CHAPTER IV. 

TRADES-UNIONISM. — NO. II. 

§ 1. Three methods by which Trades-Unions may operate on the rate of wages 242 

§ 2. Their mode of acting on the supply of labor 243 

Efiectual for its immediate purpose; but incapable of being made a 
means for the social advancement of laborers 244 

§ 3. Mode of acting on the rate of wages by " making work " 249 

Theoretical grounds of this mode of action plausible, but fallacious. . . 249 

Mr. Thornton's view stated and examined 249 

Notion that work and wages are convertible expressions 254 

Practical refutation 255 

Notion that the quantity of work to be done at any given time is fixed 2.56 

Social work indefinite 2.57 

True and only limit to the employment of labor 257 

§ 4. Examples of Trades-Union rules for " making work " 258 

Analysis and characterization of such rules 260 

Principle of this policy not confined to Trades-Unions 261 

CHAPTER V. 

PRACTICAL DEDUCTIONS FROM THE FOREGOING PRINCIPLES. 

§ 1. Socialistic objections to distribution determined by economic principles. 263 

§ 2. Maxims of distributive justice 263 

" To each according to his wants " 264 

" To each according to his works " 264 

"To each according to his sacrifice" 264 

§ 3. Examination of their applicability to actual problems 266 

§ 4. Distribution of wealth under the action of economic laws, how far co- 

, incident with the principles of abstract justice 268 

§ 5. Our present system of industry defensible on utilitarian grounds 270 

Need of a large accumulated capital 271 

Failure of socialist schemes to provide for this 272 

§ 6. Prospects offered to the laboring classes under the present regime of 

industry 273 

Productiveness of industry, how related to profits and wages 275 

Coincidence of a slight increase in the rates of wages and profits with 

a greatly increased productiveness of general industry explained 277 

The phenomenon, in what way related to rent 279 

Discouraging result of this aspect of the case 280 



CONTENTS. 7 

Page 
§ 7. No considerable improvemeut in the laboicr's condition possible while 

he remains a mere recipient of wages 3^ 

Recognition of this truth by socialistic writers; but their expedients 

for meeting the difficulty indefensible 285 

§ 8. Practical problem : To attain the socialistic end by means compatible 

with existing institutions T 287 

Difficulties moral and intellectual, not physical 287 

§ 9. Co-operation offers the sole escape from a hopeless position 289 

Present prospects of co-operation 290 

§ 10. An objection answered 291 



PART III— INTERNATIONAL TRADE. 

CHAPTER I. 

DOCTRINE OF COMPAKATIVE COST. 

§ 1. Are there grounds for a separate theory oi International trade? 297 

Rationale of trade in general 298 

Special province of International trade 300 

Impediments to the movement of capital and labor between nations. . . 302 

§ 2. Character and relative importance of such impediments 305 

§ 3. Development of the doctrine of comparative cost of production 307 

"Comparative cost" to be understood as measured by the sacritices 

uudergone, not by the wages and profits received, by producers 310 

Costs compared are the respective costs in each country of the ex- 
changed commodities, not the costs of the same commodity in the 

exchanging countries 312 

Examples of the practical working of the principle in the trade of the 

world 312 

Verification of abstract theory in tlie occurrences following the gold 

discoveries 315 

Trade between New York and Barbados 316 

Character of a large portion of International trade obscured by errone- 
ous conceptions of cost 317 

CHAPTER II. 

INTERNATIONAL TRADE IN ITS RELATION TO THE RATE OF WAGES. 

§ 1. Theory of International trade as expounded by Ricardo and Mill, not in- 
vulnerable 319 

The proximate conditions of trade are prices, not cost 319 

"Every transaction in commerce is an independent transaction " 320 

Reply from Ricardo's stand-point 321 

Criticism of this reply 322 

§ 2. Proposed modification of the theory of International trade 323 

§ 3. Prevalent opinion as to the connection between wages and International 

trade 334 

In conflict with the received economic doctrine as expounded by Ricardo 325 

Grounds of the popular view, superficial and untenable 336 

§ 4. Illustrative examples showing the effijcts of partial movements in wages 

on International trade 337 

Sugar cultivation in Queensland 329 

Effects on the external trade of England of a fall of wages in some lead" 

ing branch of manufacture, discussed 330 

§ 5. Nature of the connection between general wages and foreign trade 334 

Illustration offered by Australian experience 335 

Hypothetical illustration sliowing the nature of the connection as it 

would be developed in given circumstances in England 337 

General wages and foreign trade connected as co-ordinate effects of a 
common cause 339 



8 CONTEXTS. 

CHAPTER III. 

INTERNATIONAL VALUES. 

Pagr 

§ 1. Statement of the problem 343 

§ 2. Doctrine of international values as set forth in the received text-books, 
not reconcilable with that of Cost of Production, to be found in the 

same authorities 343 

But reconcilable with the view of cost here contended for 344 

§ 3. Practical criterion showing the relation of exchange value to cost 345 

Application of this criterion to the circumstances of the leading com- 
mercial countries 347 

§ 4. Functions respectively of Reciprocal Demand and of Cost of Production 

in relation to International values 34S 

Varieties of industrial monopoly in International trade — strict and 

qualified, one-sided and reciprocal 349 

§ 5. Conditions of commercial equilibrium 353 

§ 6. Effects of international lending and borrowing on the commercial equi- 
librium .• 359 

§ 7. The foregoing principles illustrated by the course of the United States 

external trade since 1860 364 

§ 8. Present state and immediate prospects of that trade 367 

CHAPTER IV. 

FREE-TRADE AND PROTECTION. 

§ 1. Present state of the controversy 375 

§ 2. Protection, an outgrowth of the Balance of Trade system 376 

Either system, consistently carried out, ftital to International trade. . . . 377 

§ 3. M. Alby's statement of the protectionist theory 379 

Criticism of M. Alby's statement 380 

§4. Practical issue taken in the United States — the cost of production of 

commodities 383 

The criterion proves too much 383 

And, rightly understood, refutes the protectionist argument 384 

§ 5. Alleged inability of the United States to compete with the cheap labor 

of Europe examined ". 386 

§ 6. Examination ofa ten years' experiment of Protection in the United States 388 

Difficulty of interpreting an industrial experiment 388 

Complication of results only to be imravcled by the deductive method 389 

Mr. Wells's contributions to the investigation 391 

Lesson of the experiment i 395 

J 7. Political argument in favor of Protection, as itivoring variety in industry 395 

Unfounded in the domain of " extractive industry" 397 

And not better founded in that of manufactures 399 

Demoralizing effects of a protective regime 403 

CHAPTER V. 

ON SOME MINOR TOPICS. 

§ 1. Nature of a country's interest in the scale of its general prices 407 

Maxim that "gold is of the same value all the world over" examined. 408 
A nation is interested not in having its prices high, but in having its 
gold cheap 410 

§ 3. Attempts to measure the gain on foreign trade 415 

The problem insoluble '. . 4i,s 



VALUE, 



SOME LEADING PRINCIPLES 



POLITICAL ECONOMY, 



FA^RT I. 

VALUE. 



CHAPTER I. 

PRELIMINARY. 



§ 1. The sense proper to value in economic discussion may, 
I think, be said to be universally agreed upon bj economists, 
and I may, therefore, at once define it as expressing the ratio 
in which commodities in open market are exchanged against 
each other. This, as every one is aware, is not the only or 
perhaps the most common meaning borne by "value" in gen- 
eral discourse, and hence occurs a source of ambiguity which 
some writers have proposed to avoid by eliminating the term 
altogether from the nomenclature of Political Economy. Pro- 
fessor Jevons, for example, would substitute for "value" the 
expression of " ratio of exchange." Something, it is possible, 
might be gained in point of clearness by the substitution ; but, 
on the other hand, the term "value" has become far too deep- 
ly rooted in the ordinary modes of economic thought to be 
easily displaced; nor, for my part, do I think this extreme 
course needed ; for, though no doubt there is the danger — 
associated as the word is with other meanings, and more par- 



12 VALUE. 

ticularlj with the idea of "utility"— of sliding in argumenta- 
tive discussion from the scientific into some other sense, this 
may, to a very great extent, if not entirely, be precluded by 
the simple contrivance of qualifying the term, in all doubtful 
contexts, with the prefix " exchange." " Exchange value " in- 
volves little departure from ordinary usage, and can hardly 
fail to remind the reader, where this is necessary, of the spe- 
cial and limited sense in which the word is employed. 

Value expressing a ratio or proportion existing between the 
commodities exchanged, it follows, of course, as is explained in 
all treatises, that a general rise or a general fall of values is an 
impossibility, or, rather, a contradiction in terms. If A rise in 
relation to B, B must fall in relation to A, A and B can not 
both rise or both fall at the same time in relation to each oth- 
er; and what is true of two commodities is true of any num- 
ber, and of all commodities. But though commodities in gen- 
eral can not rise or fall simultaneously in relation to each other, 
they may rise or fall in relation to any selected one among the 
number; and if gold or silver be the one selected, commodi- 
ties in general may rise or fall in relation to gold or silver. 
The value of other commodities in relation to a commodity 
thus selected is called "price." It is plain, then, that while 
a general rise or a general fall of values is a contradiction in 
terms, a general rise or a general fall of prices is a perfectly 
possible, as indeed it is a not uncommon, event. 

At the same time, although "value" expresses a relation, I 
apprehend we may use without impropriety such expressions 
as "a sura of values," or "an increase or diminution in the 
aggregate amount of values." Where, e. g., the quantity of 
valuable things possessed by a community has been increased, 
the conditions of production remaining the same ; or where, 
the quantity remaining the same, the conditions of producing 
commodities have been so altered as to cause a given quantity 
to exchange for a larger quantity than before of commodities 



"A SUM OF VALUES." 13 

of which the conditions of production have remained constant 
— in either of these cases, it seems to me, we may not improp- 
erly say that the sum of values, or the aggregate amount of 
values, has increased in that community. The usage may be 
illustrated and justified by analogous expressions emploved 
with reference to power. Power, like value, expresses a rela- 
tion; and a general increase of the power of individuals or of 
nations in relation to each other is, of course, an impossibility. 
But this does not prevent us from saying that the aggregate 
power of any given number of individuals or nations has in- 
creased; meaning thereby, not that their relative position has 
been altered, but that the elements which go to support power 
in them have been multiplied. We should thus say that the 
power of European nations has greatly increased within the 
last century. In a precisely similar sense we may speak — and 
it will often be convenient to speak — of an increase or dimi- 
nution of aggregate values ; value being only another name for 
purchasing power. 

One word more cf explanation may be given. If value ex- 
presses simply a relation, what is meant when the question is 
raised whether, in the case of two commodities of which the 
proportions in exchanging have undergone a change, the 
change is to be attributed to a fall in the value of the one, 
or to a rise in that of the other? Suppose, for example, we 
ask whether the advance in the price of butcher's meat is due 
to meat having risen or to money having fallen in value, what 
do we mean? Value expressing simply the relation of the 
commodities in exchange, the price being given, that relation 
is determined. Obviously there is a tacit reference to the 
causes on which value depends ; and the question really raised 
is not strictly as to the change in the exchange value of meat 
and money, but as to the cause or causes which have produced 
the change. If we believe that the change is traceable to a 
cause primarily affecting meat, we say that meat has risen, not 



14 VALUE. 

that money has fallen, in value ; while in the opposite case, we 
should attribute the change to the reduced value of money. 

§ 2. So much being premised as to the meaning and use of 
the term "value" in Political Economy, let us now endeavor 
to set before our minds as distinctly as may be the precise 
problems respecting value which the science proposes to solve. 
These are comprised under the following heads : 

I, We may inquire as to the circumstances which confer on 
a commodity the power of commanding other things in ex- 
change — in other words, as to the conditions essential to the 
existence of value. 

II. We may inquire as to the circumstances on whicli de- 
pend the particular proportions in which commodities ex- 
change; in other words, as to the conditions which determine 
value — an inquiry which resolves itself into two distinct is- 
sues. For, first, we may consider value as manifested in a 
given act of exchange, and inquire into the causes which de- 
termine it at a given time and place ; which is the problem of 
" market values." Or, secondly, we may regard value as the 
average proportion resulting from a series of exchanges nu- 
merous enough to allow of the neutralization of exceptional 
influences; and this is the problem of "normal values." The 
general problem of value, accordingly, embraces these three 
distinct inquiries: 1, as to the conditions essential to the ex- 
istence of value; 2, as to the conditions determining market 
values; and, 3, as to the conditions determining normal val- 
ues. 

§ 3. The two latter inquiries will be the subject of future 
consideration; but we may at once endeavor to dispose of the 
first of the three problems. And here it is obvious that one 
of the circumstances essential to the existence of value is a 
capacity of satisfying some human desire. Plainly, if an ob- 



RELATION OF VALUE TO UTILITY. 15 

ject be unable to fulfill this condition, there can be no motive 
for seeking to obtain it, still less for parting with something 
we possess in exchange for it: such an object would, therefore, 
be incapable of exchange value. The capacity, therefore, of 
satisfying a desire — in other words, the possession of utility, is 
the first condition essential to the existence of value. 

The mere circumstance, how.ever, that a commodity is ca- 
pable of satisfying a human desire will not necessarily confer 
upon it the power of commanding other things in exchange. 
Human beings will not, in pursuit of the satisfaction of their 
desires, incur sacrifice — such a sacrifice, for example, as is im- 
plied in parting with something they possess — if the end can 
be attained without submitting to this condition; and there- 
fore, in order that a commodity should have the power of com- 
manding other commodities in exchange, not only must it be 
capable of satisfying a desire, it must also be unattainable ex- 
cept on the condition of undergoing a sacrifice of some sort. 
No one living in a healthy locality, for example, will give any 
thing in exchange for atmospheric air; nor, where water is 
abundant and also universally accessible, will water fetch a 
price. But if atmospheric air be required to supply a diving- 
bell, or if water can only be had by going some distance to 
fetch it, water and atmospheric air will both acquire exchange 
value. It results, then, that the necessity of undergoing sac- 
rifice of some kind as a condition of obtaining the commodi- 
ty, or, let us say, "difficulty of attainment," must concur with 
utility in order to the existence of exchange value. And it is 
plain also that we must add, as a further condition, the possi- 
bility of transferring the possession of the articles which are 
the subject of the exchange. 

These three circumstances then — utility, difficulty of attain- 
ment, and transferableness — are the conditions essential to the 
existence of value. Where they are combined in a commodi- 
ty, that commodity has the power of commanding other things 



16 VALUE. 

in exchange': where any one of them is absent, exchange value 
can have no place, 

§ 4. This point being settled, it will be convenient here to 
enter so for into the larger problems of our subject as to dis- 
cuss a question much debated some half- century ago, and 
which has lately been revived : Does utility alone give the 
law of exchange value? in other words, are commodities eX" 
changed for each other simply in proportion as they are use- 
ful? To put the question iu a concrete form — supposing gold 
and silver to exchange for each other in the proportion of 1 to 
15 ; silver and copper to exchange in the proportion of 1 to 
30; and copper and iron to exchange in the proportion of 1 to 
3 ; are these ratios due to the fact that gold is fifteen times 
more useful than silver; that silver is thirty times more useful 
than copper; and that copper is three times more useful than 
iron ? Do the proportions of exchange invariably correspond 
to the relative utilities of those metals? And does this rule 
hold in all cases of exchange? Unsophisticated readers would, 
I should think, have no difficulty in answering this question 
in the negative; and, in truth, this is the sense in which it has 
in general been answered by political economists. Widely as 
writers have differed respecting the law governing value, they 
have generally at least agreed in the negative conclusion that 
it does not simply follow the utility of the commodity. In a 
passage which will be familiar to most readers, Adam Smith 
says: "The things which have the greatest value in use have 
frequently little or no value in exchange ; and, on the contrary, 
those which have the greatest value in exchange have frequent- 
ly little or no value in use. Nothing is more useful than wa- 
ter; but it will purchase scarce any thing; scarce any thing 
can be had in exchange for it. A diamond, on the contrary, 
has scarce any value in use, but a very great quantity of other 
goods may frequently be had in exchange for it." To the 



RELATION OF VALUE TO UTILITY. 17 

same effect Eicardo writes : " When I give 2000 times more 
cloth for a pound of gold than I do for a pound of iron, does it 
prove that I attach 2000 times more utility to the gold than I 
do to the iron ? Certainly not. ... If utility were the meas- 
ure of value, I should probably give more for the iron." Again, 
•' If I give one shilling for a loaf, and twenty-one shillings for 
a guinea, it is no proof that this, in my estimation, is the com- 
parative measure of their utility." 

In this view the English school of Political Economy have, 
I think, very generally acquiesced. The principal dissentients, 
and they have not been numerous, have been in France ; and 
of these the most eminent, perhaps, has been M. Say, who in 
his celebrated Traite takes the position that utility is not only 
essential to value, but also constitutes the exclusive condition 
determining in all cases the proportions of exchange. The 
arguments by which M. Say supported this position will be 
found in his treatise. They were answered by Eicardo in a 
later edition of his great work ; and I have, for my part, been 
accustomed to regard the controversy as settled by that reply ; 
nor should I have thought it necessary here to refer to the 
question as an open one, but that the view of M. Say has quite 
lately been revived by Professor Jevons, in his ingenious work 
on the "Theory of Political Economy." Following M. Say, 
Professor Jevons maintains that " value depends entirely upon 
utility ;" and propounds a theorem which recognizes the degree 
of utility possessed by a commodity as the exclusive condition 
determining its exchange value. Under these circumstances, 
it will be proper to consider briefly the precise significance and 
importance of this view of the law of value. 

And here I may say at once — what indeed, with the pas- 
sages which I have quoted from Adam Smith and Eicardo be- 
fore him, will already be evident to the reader — that the ques- 
tion raised by Professor Jevons, and which had previously 
been raised by M. Say, is primarily a question of words — a 

2 



18 VALUE. 

question as to what is the proper meaning of " utility." This, 
I say, is evident, because, accepting utility in the sense in which 
it is used in those passages, the statements advanced are real- 
ly not open to controversy. Nor can there be much doubt 
or difficulty as to what that sense is. Manifestly by utility 
Adam Smith and Kicardo, and those who have followed their 
doctrine on this point, have understood the quality of being 
suitable to human purposes — this quality purely and simply, 
and irrespective of extraneous considerations ; while they 
would doubtless have regarded the degree of utility as meas- 
ured by the importance of the purposes to which the useful 
commodity ministered. In this sense it is true beyond con- 
troversy that water is useful, even though it fetched nothing 
in the market, and more useful than many articles — e. g., al- 
cohol — that sell for more. The world could manifestly get 
on better without alcohol than without water. Similarly, it is 
true to say that a diamond is less useful than, e. ^., coal, and 
that gold is less useful than iron ; or, at all events, that the 
degree of utility of these several products — the importance of 
the services which they render in the economy of human soci- 
ety — is not represented by the proportions in which they ex- 
change for each other. These propositions, I say, are indis- 
putable in the sense in which they are laid down ; and, ac- 
cordingly, in taking the position that value depends entirely 
upon utility, and is measured by the degree of utility, Mr. 
Jevons must be understood to employ the term, as M. Say for- 
merly employed it, in a different sense from that in which it 
is understood by those who maintain the ordinary view. In 
point of fact this is so. Professor Jevons means by utility, 
not what Adam Smith and Ricardo meant, but their idesiplus 
something more. If we ask what that something more is, we 
find it to consist of all circumstances and considerations what- 
ever which, in any given act of exchange, exert an influence 
on those taking part in it. Thus the fact that water is capa- 



RELATION OF VALUE TO UTILITY. 19 

ble of ministering to important human purposes would not, 
as I understand the doctrine, entitle water to be considered, in 
economic estimation, a useful commodity. Before pronoun- 
cing on the point, we must know the circumstances under 
which any given dealings in the commodity take place. If 
they take place in London, where water can not be pro- 
cured in the quantity required by the population without ex- 
pense, and where it consequently bears a price, water is a use- 
ful commodity. But if the scene be changed to a country 
village, where water is abundant beyond the needs of the in- 
habitants, and consequently fetches nothing in exchange, water 
suddenly becomes useless. Consistently with this view, the 
degree of utility is measured, not by the importance of the 
purposes which the article subserves, but by the effect pro- 
duced by all the considerations aforesaid in deciding what it 
shall sell for. 4- woolen coat sells for less now than it did a 
century ago ; therefore it is less useful now than then. It sells 
for more in Australia than in England; therefore it is more 
useful in Australia than in England. According to the same 
standard of utility, every improvement in production, just in 
proportion as it cheapens a commodity, diminishes its utility ; 
while every thing that raises the cost enhances the utility. If, 
then, I have correctly interpreted Mr. Jevons's doctrine (and I 
have certainly taken every pains to understand it), the term 
"utility" stands with him for an entirely different concfption 
from that which it expresses in the language of Adam Smith, 
and of most political economists. In attempting, therefore, to 
estimate his view, we have to consider two points — first, a 
question of nomenclature, as to the convenience of this partic- 
ular use of the term ; and, secondly, one of scientific theory, as 
to the light thrown by the doctrine — utility being understood 
in the sense explained — on the phenomena of exchange value. 
As regards the question of nomenclature, it will scarcely, I 
think, be denied that Mr. Jevons's use of the term "utility " is 



20 VALUE. 

wide of the common signification, and on this ground open to 
serious objection. A use of language according to which wa- 
ter is only useful where it is paid for, and in proportion as it 
is paid for ; according to which atmospheric air is only useful 
in diving-bells, mines, and other places whither it is costly to 
carry it; according to which meat and corn are less useful 
commodities in the United States than in England, and cloth- 
ing and cutlery less useful in England than in the United 
States ; according to which diamonds are more useful than 
coal, and iron is the least useful of the metals — such a use of 
language, it will be admitted, requires strong reasons for its 
justification. No doubt, in framing a scientific nomenclature, 
it is often necessary to depart from the ordinary use of words. 
Political Economy draws its technical terms from popular lan- 
guage ; and the mere circumstance that it is obliged to assign 
a precise meaning to these terms, and to adhere strictly to this 
meaning once assigned — this circumstance alone constantly 
compels a deviation from the more or less vague and fluctu- 
ating sense which attaches to all words in extensive popular 
use. So much must be admitted. But at least the necessity 
for deviation should be made out. If a new sense be given to 
a term in order to convey a novel doctrine, it should at least 
be shown that the innovation is needed for the due apprecia- 
tion of the phenomena, and that the idea is best expressed by 
the term. In other words, it should be shown that the theory, 
for the sake of which the term is employed in the unusual 
way, can justify itself by the only test by which a theory is 
justified, namely, by explaining facts, and, if it be a new theo- 
ry, by explaining facts not explicable, or not so simply expli- 
cable, by received theories. Now I must frankly say, I have 
failed to find in Mr. Jevons's volume any such justification of 
his doctrine. 

I must go farther. The current theories respecting value, 
though, as will be seen, I am far from thinking them perfect, 



RELATION OF VALUE TO UTILITY. 81 

nevertheless do succeed in explaining a large proportion of the 
facts actually presented in the dealings of commerce. But I 
am wholly unable to conceive how any thing amounting to a 
real explanation can be extracted from the theory we are now 
considering. What does it really amount to ? In my appre- 
hension to this, and no more — that value depends upon utility, 
and that utility is whatever affects value. In other words, the 
name " utility " is given to the aggregate of unknown conditions 
which determine the phenomenon, and then the phenomenon 
is stated to depend upon what this name stands for. Suppose, 
instead of " utility," we call the unknown conditions x, we 
might then say that value was determined by x; and the prop- 
osition would be precisely as true, and, so far as I can see, as 
instructive, as Mr. Jevons's doctrine. In either case the infor- 
mation conveyed would be that value was determined by the 
conditions which determine it — an announcement, the impor- 
tance of which, even though presented under the form of ab- 
struse mathematical symbols, I must own myself unable to dis- 
cern.* 

There seems, therefore, no reason for departing from the 
hitherto commonly received sense of utility ; and it is accord- 
ingly in this sense — already defined — that I shall henceforth 
employ the term. Thus understood, utility, however essential 
to the existence of value, does not alone and exclusively give 
the law of the phenomenon. That law, or rather (for, as I 
have already observed, the phenomenon is twofold) those laws, 
we have yet to find. 

* I should be sorry if my dissent from Mr. Jevons on this point should convey 
an impression that I undervalue the work in which the doctrine I have combated 
is advanced. Though my ignorance of mathematics disqualifies me for entering 
into manv of the discussions, 1 am far from being insensible to the lucid statements 
of economic doctrine, and to the numerous original and suggestive remarks, with 
which the volume abounds. 



CHAPTER II. 

SUPPLY AND DEMAND. 

§ 1. Before proceeding to deal with the more specific prob- 
lems of value, it will be convenient to devote a brief space to a 
consideration of the agencies of Supply and Demand. If we 
were to judge by the careless freedom with which these terms 
are tossed to and fro in popular discussion, we should be apt 
to conclude that there was no portion of economic science 
which the general public had more completely at its fingers' 
ends. " The law of Supply and Demand " is commonly sup- 
posed to be a principle capable of explaining all or nearly all 
the phenomena of wealth, and which at the same time reveals 
itself by its own light. No one is imagined so ignorant as not 
to know what it means, or so dull as not to perceive its mar- 
velous efficacy as a solvent of problems. Indeed, with a large 
number of people, Supply and Demand would seem to be not 
so much conditions to be taken account of in solving problems, 
as conjuring terms, by pronouncing which difficulties may be 
exorcised, and obstacles of all sorts removed from our path 
In point of fact, I believe there is no doctrine of Political Econ 
omy more generally misunderstood, or, to speak plainly, re 
specting which a more complete absence of all clear understand 
ing of any kind prevails, than this very doctrine. The terms 
are used and the supposed " law " is appealed to, for the most 
part, without any distinct ideas being attached to the phrases 
employed. Nay, even among not a few of the professed culti- 
vators of economic science there seems to be, in respect to this 
doctrine, if I may venture to say so, a want of thoroughness 



AGGREGATES. 23 

and clearness of view singularly prejudicial to sound reason- 
ing, and which has not a little tended to throw a haze over 
some important problems of the science. 

The fundamental truth to be seized in connection with Sup- 
ply and Demand — the failure to seize which is the source of 
most of the loose reasoning and fallacious inference of which 
those terms are made the vehicle — is that, conceived as aggre- 
gates, as each comprising all the facts of that kind occurring in 
a given community, Supply and Demand are not independent 
phenomena, of which either may indefinitely increase or dimin- 
ish irrespective of the other, but phenomena strictly connect- 
ed and mutually dependent; so strictly connected and interde- 
pendent that (excluding temporary effects, and contemplating 
them as permanent and normal facts) neither can increase nor 
diminish without necessitating and implying a corresponding 
increase or diminution of the other. Aggregate demand can 
not increase or diminish without entailing a corresponding in- 
crease or diminution of aggregate supply ; nor can aggregate 
supply undergo a change without involving a corresponding 
change in aggregate demand. These propositions seem to me 
to be quite fundamental, and indeed elementary — expressing, 
as they do, consequences which arise directly from the nature 
of an industrial economy founded on the principle of separa- 
tion of employments. Fundamental and elementary, however, 
as they are, and much as has been written on the subject, 
they stand in need of all the aid that clear exposition and apt 
illustration can give them. 

§ 2. In attempting something, however inconsiderable, to- 
ward this much - needed elucidation, I would ask the reader, 
in the first place, to set before his mind the phenomena in 
their most elementary form, and to observe their essential 
character and place in the economy of industry. Supply and 
Demand are evidently facts incident to the exchange of the 



24 SUPPLY AND DEMAND. 

products of industry, which again is a consequence of the sep- 
aration of employments. So soon as people engage in pro- 
ductive industry upon the principle of separation of employ- 
ments, the need arises of exchanging the results of their work ; 
each becomes a supplier of what he has produced, a demander 
of what he seeks to consume. Let us suppose a regime of 
barter; under such circumstances Supply would consist in the 
commodities offered in exchange for other commodities. In 
what would Demand in such a case consist? We can only 
give the same reply : in the commodities offered in exchange 
for other commodities. In other words, under the simplest 
and most elementary form of exchange, Demand and Supply, 
as general phenomena, as aggregates, could not be discrimi- 
nated. Each commodity would be in turn Supply and Demand 
— Supply in reference to the person seeking to obtain it. De- 
mand in reference to the person who used it as the means of 
obtaining something else. It would be possible indeed, even 
in this state of things, to use the terms with a distinct mean- 
ing, so long as we referred the acts to individuals or to par- 
ticular products. A. B. would be a demander of certain ar- 
ticles, a supplier of others ; and the demand for meat or for 
corn would be a perfectly distinct circumstance from the sup- 
ply of meat or of corn. But, so soon as the point of view was 
shifted from the particular to the general — so soon as we at- 
tempted to conceive Supply or Demand as proceeding from 
the community at large — the phenomena would be confound- 
ed, or rather would converge into one. This, I say, would be 
the character of Supply and Demand under a regime of bar- 
ter. Let us now observe how this simple character is modi- 
fied by the introduction of a medium of exchange. A me- 
dium of exchange represents general purchasing power; and, 
all transactions being conducted through this medium, it be- 
comes possible to distinguish Demand and Supply, not merely 
in reference to particular persons and products, but as general 



ANALOGOUS CONCEPTIONS. 25 

ideas. Every act of exchange may now be regarded either 
from the point of view of him who offers general purchasing 
power, or from that of him who offers specific commodities; 
all acts of the former class may be considered together, and 
apart from all acts of the latter; and we thus arrive at dis- 
tinct general ideas of Demand and Supply. Accordingly, 
under our actual regime we speak of Demand and Supply, not 
merely as of this or of that person, but as of a whole commu- 
nity, and not merely with reference to this or that product, 
but with reference to all products : aggregate Demand or ag- 
gregate Supply thus become possible ideas. I would, there- 
fore, define the terms as follows : Demand, as the desire for 
commodities or services, seeking its end by an offer of general 
purchasing power ; and Supply, as the desire for general pur- 
chasing power, seeking its end by an offer of specific commod- 
ities or services. 

The reader will not fail to observe that, as I have developed 
the ideas in question. Demand and Supply are strictly analo- 
gous conceptions. There is on each side a mental element, a 
desire, and on each a material element, specific commodities 
and services* in one case, and that particular commodity 
which is taken as the representative of general purchasing 
power in the other; and as in each case the desire may be re- 
garded as indefinite and practically unlimited, so in each case 
the complex phenomenon is limited by its material element — 
Supply by the quantity of specific commodities offered for 
sale, and Demand by the quantity of purchasing power offered 

* It will be said, perhaps, that a "sen-ice" is not a material condition. But 
conceding this — though in truth the most numerous class of services really con- 
sist in their material effects — still conceding this, the capacity to render a sen'ice 
is always embodied in a material form. The supply of services, therefore, will be 
measured by the number of human beings able and willing to render services. 
The supply of any given kind of labor, e. g., will be measured by the number of 
laborers able and willing to perform this kind of labor. 



26 SUPPLY AND DEMAND. 

for their purchase.* The two conceptions are thus strictly 
analogous — a point on which I feel it the more necessary to 
insist, inasmuch as the contrary view is countenanced, in one 
portion of his work on " Political Economy," by the high au- 
thority of Mr. Mill. Criticising the expression " a ratio be- 
tween Demand and Supply," Mr. Mill asks, " What ratio can 
there be between a quantity and a desire, or even a desire 
combined with a power?" The criticism has been accepted 
as decisive, as far as I have observed, by all later writers : nev- 
ertheless, I feel bound to demur to it; and further, I must 
contend that the perception of the strict analogy between the 
ideas in question is a point of very great importance. " What 
ratio can there be between a quantity and a desire com.bined 
with a power?" But surely it is not correct to describe Sup- 
ply simply as a quantity. A mere quantity of goods does not 
constitute Supply until it is offered for sale, that is to say, 
until the quantity is connected with a mental feeling; and 
though it is true, as I have just pointed out, that the phenom- 
enon is measured by the quantity and not by the feeling, it 
is not the less true that Demand is also measured by its ma- 
terial element. The two conceptions are thus essentially anal- 
ogous ; and the recognition of this seems to be indispensable 
to the correct apprehension of their true relation. Accept 
the notion that Demand and Supply are facts of a different 
order, incapable of comparison and measurement, and you can 
hardly refuse to acknowledge that they are independent facts 
w^hich may increase or diminish irrespective of each other. 
But this is precisely the idea that is at the bottom of most of 
the prevalent fallacies connected with those terms. 



* I say quantity of purchasing power, because ultimately all purchasing power 
is resolvable into quantity — under our system into weights of gold; under others 
into weights of silver, or of gold and silver ; under inconvertible currencies into 
numbers of bits of paper printed in a certain way. 



DEMAND, AS " QUANTITY DEMANDED:' <ZJ 

§ 3. Mr. Mill, indeed, fully recognizes — no one more fully — 
the importance of keeping in view the strict analogy of De- 
mand and Supply ; and it is apparently, at least in part, with 
a view to this end that he gives the peculiar definition of " de- 
mand " which is to be found in the chapter from which I have 
quoted. Demand, as there defined, is to be understood as 
measured, not, as my definition would require, by the quantity 
of purchasing power offered in support of the desire for com- 
modities, but by the quantity of commodities for which such 
purchasing power is offered. There is no doubt that, as thus 
conceived, that is to say, as quantity demanded and quantity 
supplied. Demand and Supply are perfectly analogous facts; 
but, as I think I have shown, this way of regarding them is by 
no means necessary in order to render them analogous, while 
it seems to me that the idea of " demand " as quantity demand- 
ed, though not foreign to economic discussion, is very far from 
being adequate to the general purposes of the science. 

In offering a few remarks in justification of this opinion, let 
me here say that, while contending for the idea of " demand," 
as set forth above, as the proper meaning of the term, I have 
no desire to restrict the term exclusively and invariably to 
that meaning. I quite admit that it may be convenient occa- 
sionally to employ "demand" in other senses; and though the 
employment of the same economic term in different senses is 
not free from objection, it is an expedient to which the econo- 
mist must, in the dearth of language, occasionally have re- 
course; nor will much harm result, if we only bear in mind 
that the senses are distinct, and do not confound them in ar- 
gument. Moreover, I am willing to allow that the meaning 
given to "demand" by Mr. Mill in the passage in question ex- 
presses a sense in which it is sometimes convenient, perhaps 
necessary, to use the word. But, while conceding this much, 
I must still contend for the correctness of my own definition, 
as expressing the principal and proper sense of the term in 



28 SUPPLY AND DEMAND. 

economic science — meaning by this a sense more important 
and fundamental than any other to which the term in that sci- 
ence is appHed — a sense indispensable to economic exposition, 
and which "demand" easily and naturally expresses. 

The importance and fundamental character of a scientific 
idea must, I apprehend, be judged by the place which it occu- 
pies in the theories of a science. Now I have no need to go 
beyond Mr. Mill's work to show that the sense assigned to 
"demand" in my definition may be justified by this criterion. 
I take three capital theories of the science — wages, money, and 
foreign trade. In each of these Supply and Demand form 
the pivots of the doctrine, the two poles on which the exposi- 
tion turns. But when we come to consider in what sense "de- 
mand" is used in those theories, we find that in every instance 
it is regarded as represented and measured by the purchasing 
power offered, not by the quantity of commodities or services 
demanded. It is fundamental in Mr. Mill's doctrine of wages,* 
as in every sound exposition of that subject, that demand for 
labor should be understood as measured by the quantity of 
capital and other wealth offered in exchange for labor. When 
the economist speaks of an increased demand for labor as tend- 
ing to raise wages, he does not mean a demand for a larger 
number of laborers — a condition which would have no such 
tendency, unless accompanied by an increase of purchasing 
power, in this instance of capital offered ; and, this condition 
being present, the increased demand would tend to raise 
wages, whether the numbers actually responding to the call 
were larger or not ; and so of the other conclusions affecting 
wages deduced from the law of Demand and Supply : the sense 
which I have assigned to the term is the only sense in which 
they will hold good for a moment. Similarly, in his theory of 
money Mr. Mill considers the demand for money as measured 

* "Principles of Political Economy," sixth edition, book ii., chap, xi., § 1. 



PROPER SENSE OF DEMAND. 29 

by the quantity of goods of all sorts offered in exchange for 
money, not by the quantity of money demanded.* And again, 
in his theory of foreign trade,t we find "demand" steadily 
employed, as it seems to me, in the same sense. As the im- 
ports of each country represent in relation to it the measure 
of foreign supply, so its exports represent the force of its 
demand for foreign products. Thus, if England spent more 
largely on such products, that expenditure would be carried 
into effect through an increase of exports ; and that increase 
of exports would indicate an increase of international demand 
on the part of England, whatever might be the quantity of 
commodities imported. The exports of each country are thus 
the measure of its international demand ; and, as when we ex- 
tend our view from a particular country to the commercial 
world, the same commodities are in turn exports and imports, 
Supply and Demand become (as Mr. Mill is careful to point 
out) "Keciprocal Demand.'' It is only by thus understanding 
the term that I am able to assign any meaning to the very im- 
portant principle, as I regard it, developed by Mr. Mill in the 
chapter to which I am referring, and which he designates " the 
Equation of International Demand.":}: 



* "Principles of Political Economy," book iii., chap, viii., § 2. 

t Ibid., book iii., chap, xviii., § 4. 

t Mr. Mill indeed states that " the Equation of International Demand is but an 
extension of the more general law of value, which we called the Equation of Sup- 
ply and Demand," and refers to his chapter on the latter subject ; but I must con- 
fess myself unable to follow his reasoning in this remark. On the contrary, the 
two doctrines appear to me to be perfectly distinct. The equation of Supply and 
Demand, in the chapter on that subject, refers, as I understand it, to an equality 
(realized, it is alleged, in eveiy market) between the quantity of a commodity de- 
manded and the quantity of the same commodity supplied. The equality asserted, 
therefore, has reference to quantity, and to quantity embodied in a single commod- 
ity, that which is the subject-matter of exchange. The doctrine, in truth, as I shall 
hereafter have occasion more particularly to point out, amounts to an assertion 
that what is bought is equal to what is sold, that a given quantity of a given com- 



30 SUPPLY AND DEMAND. 

§ 4. I conceive, therefore, that I am justified by Mr. Mill's 
practice, if not by his precept, in understanding Demand and 
Supply in the sense in which I have defined them ; and what 
I wish now to establish is, that, as thus understood. Demand 
and Supply, in their general character, and excluding tempo- 
rary effects, are not independent phenomena, but fundamentally 
the same phenomena regarded from different points of view — 
different faces of the same facts; and that consequently nei- 
ther can increase nor diminish without a corresponding increase 
or diminution of the other. 

If the reader will recall the description which I gave a few 
pages back of what would be the nature of Supply and De- 
mand under a system of barter, he will have no difficulty, I 
think, in admitting the essential soundness of this position, 
though he may not find it easy at once to reconcile it with 
some facts that we witness under our actual industrial economy. 
It was then pointed out that Demand and Supply, on the sup- 
position of exchange being carried on by barter, though dis- 
tinct conceptions so long as we refer them to particular indi- 
viduals or products, become incapable of discrimination, so 
soon as we pass from the particular to the general point of view 
and regard them as aggregates. The total demand of a com- 
munity would under such circumstances be represented by 
all the commodities and services there offered in exchange for 
other commodities and services; and these would also consti- 
tute the total supply in that community. Now the essential 
character of exchange is not altered by the employment of a 
circulating medium, however the increased complexity of the 

modity is equal to itself. But the equality asserted in " the Equation of Interna- 
tional Demand," as I understand it, is far from being of this nature : it refers not 
to quantity but to valtie, the value, namely, of the imports and exports of each 
commercial country ; nor is it realized in a single commodity, but in two distinct 
groups of commodities, namely, those issuing from and those entering such coun- 
tries. 



NOT INDEPENDENT PHENOMENA. 31 

facts may tend to conceal its true nature. The process is facil- 
itated, but what happens is in effect the same. It is still an 
exchange of commodities and services against commodities and 
services: and the relation between Demand and Supply re- 
mains what it was in the simpler case. It is true, where we 
have a medium of exchange, we can form the conception of 
general Demand as distinct from general Supply — a distinction 
which disappears under a barter regime — because we can sepa- 
rate in our thoughts general purchasing power from specific 
commodities. But in point of truth and fact the two things 
are not separable. Purchasing power, in the last resort, owes 
its existence to the production of a commodity, and, the condi- 
tions of industry being given, can only be increased by increas- 
ing the quantity of commodities offered for sale ; that is to say, 
Demand can only be increased by increasing Supply. The 
purchasing power of England is represented by the aggregate 
of all her products ; and as it can not increase except through 
an increase of these, so an increase of her products (if adapted 
and duly proportioned to the requirements of human beings), 
will, other things being the same, carry with it a corresponding 
increase of her purchasing power. It follows, therefore, that 
the relation of general Demand and general Supply to each 
other is not affected by the employment of a circulating me- 
dium, but continues essentially the same under a monetary, as 
under a barter, regime. In neither case are they independent 
facts, but essentially the same facts presenting themselves under 
different aspects. Demand, as a general phenomenon, can not 
exist without Supply, and can not increase except in propor- 
tion as Supply increases. This, I repeat, is fundamental in the 
theory of exchange ; and all assumptions to the contrary must 
be regarded as baseless and absurd. 

§ 5. The illusion which I am combating, that Demand and 
Supply are independent economic forces^ sometimes assumes 



32 SUPPLY AND DEMAND. 

another form in the notion that producers and consumers are 
distinct classes, and that production and consumption are acts 
which may go on irrespective of each other. It is true, indeed, 
there are consumers who are not producers (and the bearing 
of this fact on the theory just expounded I shall presently con- 
sider); but in the main the relation of consumers and produ- 
cers in an industrial community may be thus illustrated. A 
certain number of people, A, B, C, D, E, F, etc., are engaged 
in industrial occupations — A produces for B, C, D, E, F ; B for 
A, C, D, E, F ; C for A, B, D, B, F, and so on. In each case 
the producer and the consumers are distinct, and hence, by a 
very natural fallacy, it is concluded that the whole body of 
consumers is distinct from the whole body of producers ; where- 
as they consist of precisely the same persons. Producers are 
identified with Supply; consumers with Demand; and thus 
the belief in the independence of those agencies seems to find 
confirmation. The prevalence of this notion was brought into 
view very prominently in the discussion which took place a 
year or two back on the nine hours' movement. By several 
of those who took part in that discussion, and among these by 
some who wrote with not a little parade of economic knowl- 
edge, it was assumed almost as axiomatic, that the result of the 
movement, supposing it to be extended to the whole circle of 
industry, would be a general increase of Demand beyond Sup- 
ply, issuing in a general advance of prices. The producers, it 
was seen (unless their industry gained in efficiency what it lost 
in duration), would on the whole produce less; and therefore 
Supply would diminish ; but, not perceiving any connection 
between Supply and Demand, the disputants took it for grant- 
ed that Demand would go on as before. It will be scarcely 
necessary now, I trust, to point out the gross fallacy of the as- 
sumption. The producers are also consumers ; and if, on the 
whole, less is produced, there would, on the whole, be fewer 
commodities to be exchanged. But why should this afiect the 



PRODUCTION AND CONSUMPTION. 33 

proportions in which thej are exchanged? or why should it 
affect the relations between commodities in general and money ? 
If a given group of laborers and capitalists produce less (how- 
ever they may divide the produce among themselves), they 
have, as an aggregate, less to offer for sale ; and, as all other 
groups of laborers and capitalists, including those who are the 
means, direct or indirect, of bringing gold and silver into the 
country, would also have less to offer for sale, the relative po- 
sition of each to the community would not be disturbed; and 
the diminution of general Supply would be exactly balanced 
by a corresponding diminution of general Demand. The ab- 
surdity, of the supposition might indeed be more easily shown 
by simply adverting to the principles governing the value of 
money, and by showing the impossibility of its being altered 
by such a cause as the movement in question ; but the error, in 
truth, goes deeper, and can only be adequately exposed by ref- 
erence to the fundamental character of industrial exchange as 
determined by the separation of employments. 

But a formidable obstacle to the doctrine of the mutual 
interdependence and fundamental identity of Demand and 
Supply is supposed to exist in the presence in all wealthy 
communities of a large body of persons who are consumers 
merely, the idle rich, nati consumere fruges — people, it will be 
urged, who take^ a large and effective part in consumption and 
Demand, but who produce nothing, and contribute nothing to 
Supply. How, it will be asked, is the existence of this class 
to be reconciled with the doctrine for which I am contending? 
It must at once be admitted that the existence of an idle rich 
class shows that the classes of producers and consumers are not 
necessarily and always conterminous; but this is not the issue 
I have raised, but the dependence of consumptive power upon 
production, and of Demand upon Supply. Let me here ex- 
plain that by "consumptive power" I mean, as I apprehend 
those who employ it in this controversy mean, not the mere 

8 



34 SUPPLY AND DEMAND. 

physical capacity to consume, but the economic conditions 
which minister to the physical capacity. Understanding it in 
this sense, then, I contend that in the case of the idle rich, as 
in all other cases, consumptive power is limited and measured 
by production, and Demand by Supply. To perceive this, we 
have, in truth, only to dip just below the surface. Whence is 
their purchasing power derived ? It does not descend to them 
from the skies; nor is it obtained by submarine telegraph di= 
rect from California or Australia ; nor is its existence exhaust- 
ively accounted for by the presence of certain figures on the 
credit side of their accounts in their bankers' books. Let us 
suppose the class in question to be represented by certain land- 
lords, mortgagees, and fund-holders. In the first two cases their 
purchasing power, that is to say, their rents and interest, would, 
of course, be derived from the sale of certain agricultural prod- 
ucts; in the last, also from the sale of products — the products, 
namely of those who pay the taxes — in all cases from produc- 
tion and supply. The phenomenon is merely one of a transfer 
of purchasing power from one set of people to another, who in 
virtue of contracts are entitled to receive it. If the idle land- 
lords, mortgagees, and fund-holders were to vanish into space, 
would the demand of the community diminish? Certainly 
not, so long as production and supply continued as before. 
The only difference would be that different persons would now 
consume and determine the direction of demand. It was 
formerly certain idle landlords, mortgagees, and fund-holders: 
it would now be certain producers and tax-payers, who, find- 
ing themselves in possession of an enlarged purchasing power, 
would, I think we may assume, know how to use it. That 
useful function, therefore, which some profound writers fancy 
they discover in the abundant expenditure of the idle rich, 
turns out to be a sheer illusion. Political Economy furnishes 
no such palliation of unmitigated selfishness. Not that I would 
breathe a word against the sacredness of contracts. But I think 



PRODUCTION AND CONSUMPTION. 35 

it is important, on moral no less than on economic grounds, 
to insist upon this, that no public benefit of any kind arises 
from the existence of an idle rich class. The wealth accumu- 
lated by their ancestors or others on their behalf, where it is 
employed as capital, no doubt helps to sustain industry; but 
what they consume in luxury and idleness is not capital, and 
helps to sustain nothing but their own unprofitable lives. By 
all means they must have their rents and interest, as it is writ- 
ten in the bond ; but let them take their proper place as drones 
in the hive, gorging at a feast to which they have contributed 
nothing. 

One more illustration of the same fallacy will not perhaps 
be superfluous. A colony of rich persons establish themselves 
in a foreign country, where they practice no useful industry or 
art, but simply expend and consume. We may take as our 
example the English and other foreign residents at such resorts 
as Pau, Nice, and Eome. Whether such residents confer ben- 
efit of any sort on the people among whom they settle is a 
point which I do not now raise : I may possibly find occasion 
to consider it farther on. But what I wish now to make clear 
is, that, if any benefit does arise from the expenditure of such 
people, it is no instance of a good accruing to a community 
from Demand as distinct from and independent of Supply. The 
demand of those foreign residents owes its efficacy (whatever 
that may amount to) to the supply by which it is supported, 
as certainly as if they each and all rented farms and lived upon 
the direct produce of their own exertions; for how is their 
purchasing power conveyed to them ? They receive it most, 
probably in circular notes or bills, which are perhaps cashed 
in coin ; but how are these instruments finally liquidated ? 
Simply in commodities sent from England or the other coun- 
tries from which the residents in question come. In other 
words, every increase in the demand of English people resid- 
ing in France for French goods is accompanied and rendered 



36 SUPPLY AND DEMAND. 

possible by an increase in the supply of English commodities 
to the French people. There is no other way in which in the 
long run it can be supported — a fact, by-the-way, which throws 
a curious light on the absurdities of Protection. None are so 
anxious to encourage such idle residents from foreign countries 
as protectionists; but while eager to accomplish this object, 
they do all in their power to render it impossible. They would 
have English visitors swarming in their capitals, and spending 
there their money on French products; but they would at the 
same time put under interdict the only possible means by 
which in the long run Englishmen can meet their expenses. 
The protective system is thus an attempt to sever Demand and 
Supply, and to render them independent of each other — a feat 
which will be performed when the circle is squared. 

§ 6. I have so far spoken of Demand and Supply as general 
facts, as related not to particular commodities or services, but 
to commodities and services in general. I proceed now to con- 
sider them as they stand related to particular commodities and 
services. And here we must in the first place note that that 
fundamental identity and mutual interdependence which have 
been found to characterize the phenomena in the light in which 
we have hitherto regarded them, are no longer observable when 
they are considered with reference to particular commodities. 
Thus, as I have shown, it is impossible for the general demand 
of a community to increase or diminish save through a corre- 
sponding increase or diminution of the general supply of com- 
modities in that community; but it is perfectly'- possible that 
the demand for a particular commodity or service should in- 
crease or diminish, the supply undergoing no corresponding 
change ; and, as every one will recognize, such failure of cor- 
respondence between Supply and Demand is the most common 
of all occurrences. In truth, it but rarely happens that the 
supply of any commodity remains for any length of time in 



OF FABTICULAE ARTICLES. 37 

perfect accordance with the demand for it. What we find is a 
pretty constant state of fluctuation ; the demand sometimes in 
excess of the supply ; the supply sometimes in excess of the 
demand ; and the alterations in the relation indicated by par- 
allel alterations in the prices of the commodity so affected. 

I have spoken of supply corresponding with, or being greater 
or less than, demand in the case of a given commodity. There 
is no expression in more frequent use in commercial and eco- 
nomic discussion ; and it is probable that most people will 
think that it stands in need of no elucidation. But the slight- 
est reflection will show that its meaning is by no means so 
clear as it might at first sight be considered. What is meant 
by the supply of a given commodity being equal to the de- 
mand for it? The demand varies with the price ; and so does 
the supply. It is evident, therefore, that, to give meaning to 
our assertion, it must be understood as made with reference to 
some assumed price; but what price? This is a point which 
is not at once apparent. 

Again, supposing this difficulty got over, and that we have 
settled at what price Demand and Supply are to be taken, de- 
mand at a given price may be measured either by the quantity 
of purchasing power offered, or by the quantity of the commod- 
ity demanded. Which standard are we to adopt? I have 
already stated my view as to the proper sense of " demand ;" 
nor do I see any necessity for departing in this context from 
the meaning I have contended for. According to that view, 
as Supply would be measured by the quantity of the commod- 
ity offered, so Demand would be measured by the quantity of 
purchasing power offered ; and the "correspondence" (which I 
think would be a better word than " equality ") of Supply with 
Demand at a given price would mean such a state of Demand 
and Supply as would result, on the one hand, in the absorption 
of the purchasing power forth-coming at this price by the sup- 
ply at the same price ; and, on the other hand, in the absorp- 



38 SUPPLY AND DEMAND. 

tion of the supply by the purchasing power; while the non- 
correspondence of Supply and Demand would mean the exist- 
ence of an unsatisfied residuum on either side. This, 1 confess, 
is the sense of the phrase which I should myself, on scientific 
grounds, prefer. I have admitted, however, that there are oc- 
casions in which " demand " may conveniently be employed in 
other senses ; and this perhaps is one of them. At all events 
it is certain that, understanding Demand in this context as 
measured by the quantity demanded, the result will not be af- 
fected by the change of standard. When Supply corresponds 
with Demand in the one sense, it will correspond with it in the 
other; and as the latter, that is to say Demand, as measured 
by quantity demanded, is perhaps the more familiar concep- 
tion where the problem has to do with particular commodities, 
it will on the whole, perhaps, be Ynore convenient to adopt this 
sense for the purposes of this particular discussion, I shall 
therefore understand equality or correspondence of Demand 
and Supply at a given price, when particular commodities are 
in question, as meaning equality or correspondence of quantity 
demanded with quantity supplied at that price. 

But we have got to determine what is the price assumed or 
contemplated in statements regarding the equality or inequal- 
ity of Supply and Demand. To resolve this point, two sorts 
of such statements must be considered. We may assert the 
equality or inequality of Demand and Supply either with ref- 
erence to a particular occasion, or with reference to a continu- 
ing state of things. We may say, for example, that the de- 
mand for wheat exceeded the supply in a particular market; 
or we may say that the demand for meat has for some time 
exceeded, and is likely for some time longer to exceed, the 
supply of that article. In the former case, it seems to me, the 
price assumed, so far as people speak with distinct meaning, 
would always be the price current in the particular market ; 
and the statement would mean that there were people in that 



OF PARTICULAR ARTICLES. 30 

market who at the current price would have purchased more 
wheat had it been at that price obtainable. I am aware that, 
in assuming the possibility of such an occurrence as a market 
price which does not equalize Supply and Demand, I am put- 
ting myself in conflict with a celebrated theory. I hope, how- 
ever, afterward to justify this boldness. For the moment I as- 
sume that the price current in the particular market is the 
price with reference to which statements of the kind we are 
considering are made ; and common language certainly pre- 
supposes the possibility of a divergence of Demand and Sup- 
ply at this price. But how with regard to assertions of the 
other kind indicated, where we declare that, as a continuing 
state of things, the demand for a commodity is in excess of the 
supply of it — shall we say, following the analogy of the expla- 
nation just given, that the price here assumed is the price cur- 
rent during the period to which the remark applies ; and that 
the meaning is that the demand at that price has been and is 
likely to be in excess of the supply ? If we attempt to deal 
with any actual case we shall find that this explanation will 
not serve us. For example, most persons acquainted with the 
present state of the iron trade would say that the demand for 
iron at the present time — meaning, not in this or that market, 
but in the country generally and over a period of some dura- 
tion — is greatly in excess of the supply, and would point to 
the advance in price as evidence of this. Now it is certain 
that, in the opinion of those most competent to form an opin- 
ion, in the opinion of dealers and speculators in the article, the 
demand for iron in the country at the present time is not in 
excess of the supply of it at existing prices; for did they think 
so, they would at once by purchases raise the price beyond its 
present level. In truth, the precise function which such per- 
sons perform is that of adapting demand to supply by acting 
on price ; and, however the adaptation may fail in particular 
markets, it is impossible that, as a phenomenon of some dura- 



40 SUPPLY AND DEMAND. 

tion, the demand at existing prices should remain, and be 
known to be, in excess of the supply. How, then, are we to 
deal with the assertion which undoubtedly would be made by 
those very persons? It is perhaps not improbable that most 
of those who make it have not very clearly defined their mean- 
ing. Still it would be unreasonable to assume that, where so 
many people, experts in the matter in hand, concur in mak- 
ing the same statement, their assertion is absolutely without 
meaning. I shall certainly not presume to find a meaning for 
any one, but I venture to lay down this proposition, that, in 
order to render such statements as those of which I have given 
examples at once significant and true, demand must be under- 
stood as existing at some price other than that actually pre- 
vailing in the markets ; and if I am asked to say what that 
price is, I answer, the " normal price " — the price which, in the 
absence of disturbing causes, people consider would be the 
price of the commodity. Accordingly, the sense in which I 
understand statements of the kind under consideration, which 
apply not to particular markets but to a state of things for 
some time in existence, is as expressing the result of a com- 
parison between demand taken as it would exist at the normal 
price, and supply either such as it would be at that same price, 
or such as it actually is. Thus understood, such statements be- 
come significant ; and, if founded on knowledge of the facts in 
question, convey information of a really important kind. The 
result, then, of this verbal but necessary discussion may be 
thus summed up : 

1st. Supply and Demand, when spoken of with reference to 
particular commodities, must, if our statements are to be sig- 
nificant, be understood to mean Supply and Demand at a given 
price ; the comparison of Supply and Demand at that price, 
being made by comparing the quantity of the commodity sup- 
plied with the amount of purchasing power offered, or with 
the quantity of the commodity demanded. For consideratioDs 



OF PARTICULAR ARTICLES. 41 

of practical convenience, the latter measure of Demand is em- 
ployed in this particular discussion. 

2d. Where statements respecting the supply and demand of 
particular commodities have reference to particular markets, 
the price assumed as that at which Demand and Supply are 
compared is the price current in that market. 

3d. Where such statements have reference to the country at 
large and to a continuing state of things, then the price as- 
sumed as that at which Demand is measured is the normal 
price of the commodity, while Supply is considered as meas- 
ured either at this or at the actual price. The comparison in- 
stituted is thus between Demand at the normal price, and Sup- 
ply either at the normal or at actual prices. 

§ 7. The meaning of this part of our phraseology being thus 
ascertained, I proceed to lay down what seems to me the fun- 
damental law of Demand and Supply considered in connection 
with particular commodities. It is as follows: The supply 
of a commodity always tends to adapt itself to the demand at 
the normal price. I may here say briefly, that by the normal 
price of a commodity I mean that price which suffices, and no 
more than suffices, to yield to the producers what is considered 
to be the average and usual remuneration on such sacrifices as 
they undergo ; and the statement is that the supply of each 
commodity tends to adapt itself to the demand at this price. 
That it does so is the direct consequence of the motives which 
induce people to engage in productive industry, and which at- 
tract them, so far as circumstances permit, toward those occupa- 
tions which offer the largest rewards in proportion to the sac- 
rifices undergone. It follows from this that, where the price 
of a commodity is above the normal level, and where con- 
sequently the producers are reaping more than average rewards, 
more producers will be drawn to that employment, and the 
supply of the commodity will be increased. But the increase 



4a SUPPLY AND DEMAND. 

of supply, by the competition for sales, will tend to lower price, 
and thus to bring it down toward the normal level. If the 
increase of supply is not sufficient to reduce the market price 
quite to the normal level, then, under the influence of the same 
industrial motives, supply will be further increased ; and the 
process will go on till this result is accomplished. On the 
other hand, if the stimulus to production carry the movement 
too far and price fall below the normal level, motives of the 
opposite kind will at once come into play to curtail production, 
and the price will rise till the normal level be once more reach- 
ed. Such is the law of Supply and Demand in relation to par- 
ticular commodities: it is described by Adam Smith under the 
figure of a gravitation of market toward natural price ; but, 
however described, it is fundamental in this part of our sub- 
ject, and is the constant assumption running through all reason- 
ings which have to do with value and price. It is not, how- 
ever, necessary to advert to its bearings further at present; 
these will sufficiently appear in the course of the following 
discussions. 

I recapitulate briefly the results of the present chapter: 

I. Demand and Supply, considered as general facts, are not 
independent phenomena, but essentially the same phenomena 
regarded from different points of view; consequently general 
Demand can not increase or diminish, except in constant rela- 
tion with general Supply. All notions and doctrines there- 
fore that proceed upon the contrary assumption are unfounded 
and fallacious. 

II. Demand and Supply, considered with reference to par- 
ticular commodities, may increase or diminish (in the sense ex- 
plained) in relation to each other; but in all their mutations 
they obey this law: Supply always tends to adapt itself to 
Demand at the normal price of the commodity. 



CHAPTER III. 

NORMAL VALUE. 

% 1. The attribute of normal or usual value implies system- 
atic and continuous production. We can not predicate normal 
value of a commodity of which the supply is limited and can 
not be increased — for example, of a picture of Turner's; be- 
cause, although it would be possible from a number of sales of 
such pictures to strike an average, this average would merely 
represent the mean of fluctuations uncontrolled by any presid- 
ing principle, and so, as having no tendency to keep themselves 
within any certain bounds, incapable of being made the ground 
of expectation as to the course of future prices. But when a 
commodity is systematically and continuously produced, the 
existence of a normal value soon reveals itsslf. It is perceived 
that, however greatly the price may vary from time to time, 
the variations do not occur at random, but obey a hidden prin- 
ciple, and tend to conform to a certain rule. The price of 
wheat may be unusually high one year, but this at once calls 
into action forces which control the advance, and ultimately 
bring back the price to its usual level ; or the price may be 
exceptionally low, and then the same forces are ranged on the 
opposite side, and the price rises. In this way the fluctuations 
of the market are kept within certain, not perhaps precisely 
determinable, but still real, limits, with a constant tendency to 
approach a central point — the point of " normal value " of which 
we are in quest. 

I have remarked that an average of the actual sales effected 
of a commodity, that is to say, of its market prices, does not 



44 NORMAL VALUE. 

necessarily represent its normal price or value, because the 
commodity may exist under conditions which do not supply 
any controlling principle to its fluctuations, and consequently 
do not develop any tendency in these to revolve round a cen- 
tral point. But it is still true that, where the conditions for 
evolving a normal value do exist, that is to say, where a com- 
modity is systematically and continuously produced, the nor- 
mal value will generally be coincident with the average of act- 
ual sales, if only the number of instances taken be sufficient to 
eliminate the effects of what we may call disturbing causes — 
causes, that is to say, which interfere with the adaptation of 
supply to demand.* The number of instances necessary to ef- 
fect such elimination will vary greatly with the nature of the 
commodity. It will in general be least in articles of ordinary 
manufacture, much greater in those of raw produce, and great- 
est of all in products of the animal kingdom. These, however, 
are points which will be more conveniently elucidated in con- 
nection with the subject of market values. 

One word more of explanation. Normal values, though, in 
contrast with market values, they may not improperly be de- 
scribed as average or permanent values, must not be supposed 
to represent any thing absolutely fixed or constant in the ex- 
change relation of commodities. There is no such fixedness 
or constancy to be found in that relation. All that we can 
properly understand by the permanency predicated of such val- 
ues is that they remain the same so long as the conditions of 
production remain the same. In point of fact, the conditions 
of production of all commodities undergo change, and those of 
most commodities frequent and extensive change. In general, 
however, these changes, where they are of much importance, 
occur at intervals of some duration, and in the intervening 



* For the precise sense in which these words are used the reader is referred ta 
ante pp. 40, 41. . 



COST OF PEODUCTION. 45 

periods the normal price remains constant. The centre about 
which market prices oscillate is thus not a fixed, but a mov- 
able centre ; moving, however (as will be fully set forth in a 
subsequent chapter*), for the most part in constant directions, 
determined by the character of the commodity and the cir- 
cumstances under which it is produced. Thus in most manu- 
factured goods the course of normal prices in this country has 
for some centuries been steadily downward ; while on the oth- 
er hand, the normal prices of raw produce, and more particu 
larly of produce of the animal kingdom, have pretty constant- 
ly risen. 

So far as to the character of the phenomenon which now 
claims our attention. It remains to consider the conditions 
which determine it. 

§ 2. The current theories of value connect normal value 
(called by Adam Smith and Eicardo " natural value," and by 
Mr. Mill " necessary value," but best expressed, it seems to 
me, by the term which I have usedf) with one set of condi- 
tions only, those, namely, comprised under the phrase "cost 
of production;" and some writers would, under this notion, 
distinguish such values as " cost values." But this, it seems 
to me, is to take a much too limited view of the range of this 
phenomenon. The essence lies in the tendency of the ex- 
changes of the market to gravitate toward a central point; 
wherever that tendency is observable, we can predicate of the 
commodities which exhibit it the possession of a central, usual, 
or normal value. Now, to go no farther at present, such a 
tendency exists in the relative values of the commodities ex- 
changed by different nations, or, as they are called, " interna- 



* See chap. v. of this Part. 

1 1 have adopted the term from M. Cherbuliez's excellent work, "Precis de la 
Science ^conomique." 



46 NORMAL VALUE. 

tional values." In other words, trading countries exchange 
their productions in certain proportions, which, in any given 
state of industry, manifest the condition of normality. Devia- 
tions may, and do occur, but forces are in existence which 
tend constantly to bring back the proportions to the normal 
line. International values, however, are admittedly — or at all 
events are demonstrably — not governed by cost of production, 
and we have thus normal values which are not connected 
with cost, but come under the influence of some other princi- 
ple. And I shall afterward have occasion to show that, even 
in domestic exchanges, cost of production is by no means co- 
extensive with the range of this phenomenon. 

Cost of production, however, is undoubtedly the principal 
and most important of the conditions on which normal value 
depends. Not only, as will be shown, does it absolutely de- 
termine that relation over a very wide field of exchange trans- 
actions, but over perhaps a still wider it exercises, not a de- 
cisive, but a powerful influence, and within certain limits con- 
trols the results. It is therefore necessary, at the outset of 
our discussion, to' ascertain the true nature of Cost of Produc- 
tion, a clear perception of which, I may observe, quite irre- 
spective of the theory of value, is indispensable for the solu- 
tion of most of the problems of production and distribution. 

The following is the analysis of Cost of Production given 
by Mr. Mill, and which, so far as I know, has been acquiesced 
in, either expressly or implicitly, by economists alike in this 
and in other countries : 

" The component elements of Cost of Production have been set forth 
in the first part of this inquiry. The principle of them, and so much the 
principle as to be nearly the sole, we found to be Labor. What the pro- 
duction of a thing costs to its producer, or its series of producers, is the 
labor expended in producing it. If we consider as the producer the 
capitalist who makes the advances, the word ' labor ' may be replaced by 
the word ' wages :' what the produce costs to him, is the wages which 



I 



I 



COST OF PBODUCTIOM. 47 

he has had to pay. At the first glance, indeed, this seems to be only a 
part of his outlay, since he has not only paid wages to laborers, but 
has likewise provided them with tools, materials, and perhaps buildings. 
These tools, materials, and buildings, however, were produced by labor 
and capital ; and their value, like that of the article to the production 
of which they are subservient, depends on cost of production, which 
again is resolvable into labor. The cost of production of broadcloth does 
not wholly consist in the wages of weavers ; which alone are directly 
paid by the cloth manufacturer. It consists also of the wages of spin- 
ners and wool-combers, and, it may be added, of shepherds, all of which 
the clothier has paid for in the price of yarn. It consists, too, of the 
wages of builders and brick-makers, which he has reimbursed in the con- 
tract price of erecting his factory. It partly consists of the wages of ma- 
chine-makers, iron-founders, and miners. And to these must be added 
the wages of the carriers who transported any of the means and appli- 
ances of the production to the place where they were to be used, and the 
product itself to the place where it is to be sold." . . . . " Thus far of la- 
bor, or wages, as an element in cost of production. But in our analysis, 
in the First Book, of the requisites of production we found that there is 
another necessary element in it besides labor. There is also capital ; and 
this being the result of abstinence, the produce, or its value, must be 
sufficient to remunerate, not only all the labor required, but the absti- 
nence of all the persons by whom the remuneration of the different class- 
es of laborers was advanced. The return for abstinence is Profit. And 
profit, we have also seen, is not exclusively the surplus remaining to 
the capitalist after he has been compensated for his outlay, but forms, in 
most cases, no unimportant part of the outlay itself. The flax-spinner, 
part of whose expenses consists of the purchase of flax and of machinery, 
has had to pay, in their price, not only the wages of the labor by which 
the flax was grown and the machinery made, but the profits of the grow- 
er, the flax-dresser, the miner, the iron-founder, and the machine-maker. 
All these profits, together with those of the spinner himself, were again 
advanced by the weaver, in the price of his material — linen yarn ; and 
along with them the profits of a fresh set of machine-makers, and of the 
miners and iron-workers who supplied them with their metallic mate- 
rial. All these advances form part of the cost of production of linen. 
Profits, therefore, as well as wages, enter into the cost of production 
which determines the value of the produce." .... 
" Profits, however, may enter more largely into the conditions of pro- 



48 JSVKAIAL VAL,OJt!J. 

duction of one commodity than of another, even though there be no dif- 
ference in the rate of profit between the two employments. The one 
commodity may be called upon to yield profit during a longer period of 
time than the other. The example by which this case is usually illus- 
trated is that of wine. Suppose a quantity of wine and a quantity of 
cloth made by equal amounts of labor, and that labor paid at the same 
rate. The cloth does not improve by keeping ; the wine does. Sup- 
pose that, to attain the desired quality, the wine requires to be kept five 
years. The producer or dealer will not keep it, unless at the end of five 
years he can sell it for as much more than the cloth as amounts to five 
years' profit accumulated at compound interest. The wine and the cloth 
were made by the same original outlay. Here, then, is a case in which 
the natural values, relatively to one another, of two commodities, do not 
conform to their cost of production alone, but to their cost of production 
plus something else. Unless, indeed, for the sake of generality in thej 
expression, we include the profit which the wine-merchant foregoes dur- 
ing the five years in the cost of production of the wine : looking upon it 
as a kind of additional outlay, over and above his other advances, for 
which outlay he must be indemnified at last."* 

And finally he thus sums up: 

" Cost of Production consists of several elements, some of which are 
constant and universal, others occasional. The universal elements of 
cost of production are the wages of the labor and the profits of the cap- 
ital. The occasional elements are taxes, and any extra cost occasioned 
by a scarcity value of some of the requisites, "t 

§ 3. Such is the view of Cost of Production which must be 
considered as now generally accepted by economists. But in 
spite of the great authority properly attaching to any doctrine 
propounded by Mr. Mill, and enhanced as this is in the pres- 
ent instance by the general concurrence of economists, I am 
compelled to dissent from it. It seems to me that the concep- 
tion of cost which it suggests is radically unsound, confound- 

* "Principles of Political Economy, "book iii., chap, iv., § 1, 4, 5. 
t Ibid., book iii., chap, vi., § 1. 



i 



"COST" AS WAGES AND PROFIT. 4a 

ing things in their own nature distinct and even antithetical, 
and setting in an essentially false light the incidents of pro- 
duction and exchange; further, I think it will appear that it 
leads to practical errors of a serious kind, not merely with re- 
gard to value, but also with regard to some other important 
doctrines of the science. 

Of all ideas within the range of economic speculation, the 
two most profoundly opposed to eacli other are cost and the 
reward of cost — the sacrifice incurred by man in productive 
industry, and the return made by nature to man upon that 
sacrifice. All industrial progress consists in altering the pro- 
portion between these two things; in increasing the remuner- 
ation in relation to the cost, or in diminishing the cost in re- 
lation to the remuneration. Cost and remuneration are thus 
economic antitheses of each other; so completely so, that a 
small cost and a large remuneration are exactly equivalent 
expressions. Now, in the analysis of cost of production which 
I have quoted, these two opposites are identified ; and cost, 
which is sacrifice, cost, which is what man pays to nature for 
her industrial rewards, is said to consist of wages and profits, 
that is to say, of what nature yields to man in return for his 
industrial sacrifices. The theory thus in its simple statement 
confounds opposite facts and ideas, and further examination 
will show that it involves conclusions no less perplexed, and 
in conflict with doctrines the most received. 
- For, first, if the analysis in question be accepted, and wages 
and profits be taken as the constituents of cost of production, 
this conclusion follows : that the cost of producing commodi- 
ties, taking industry as a whole, is a constant condition, in- 
capable, however great or universal the progress of industrial 
improvement, of undergoing change. Suppose, for example, 
the general productiveness of industry were increased ; this 
would mean that the aggregate results of industry in return 
ifor a given exertion of labor and abstinence were increased; 



60 NORMAL VALUE. 

in other words, that the fund from which wages and profits 
were paid had increased in relation to the labor and absti- 
nence expended. Wages and profits, therefore, as an aggre- 
gate would rise exactly in proportion as industry had become 
more productive ; and the cost of producing a given commod- 
ity, measured in wages and profits, would thus remain precise- 
ly as before. There would be less labor and abstinence ex- 
erted, but this smaller exertion being more highly remuner- 
ated, the cost, measured in the remuneration, would suffer no 
change. I may mention that this is no fanciful deduction of 
mine, but has in effect been applied by at least two writers to 
the solution of a practical question. In a paper read some 
years ago before the Dublin Statistical Society, it was argued 
by Dr. Hancock that the cost of producing gold had not been 
reduced by the gold discoveries ; and what was Dr. Hancock's 
proof of this assertion? Simply this, that the wages and 
profits of the producers of gold had increased as much as the 
labor and abstinence required for the production of a given 
quantity of gold had diminished, leaving thus, he said, the 
cost of production unchanged. The facts were undoubtedly 
as the argument assumed, and the inference was strictly in ac- 
cordance with the accepted view of cost of production. But 
the inevitable conclusion (which Dr. Hancock did not draw) 
would be that the depreciation of gold is impossible.* 

Take another example of the consequences involved in this 
doctrine. If it be true that the wages and profits received by 
the producers of a commodity are the measure of its cost of 
production, then it follows that all commodities whatever, it 
matters not under what circumstances produced, whether of 
competition or of monopoly, exchange, and can not but ex- 
change, in proportion to their costs of production. This re- 

* The same argument, in principle, will be found in the sixth volume of Tooke 
and Newmarch's •' History of Prices," part vii., § 14. 



"COST" AS WAGES AND PROFITS. 51 

suits at once from the consideration that the value of a com- 
modity, where it is continuously produced, constitutes for the 
producers the fund from which wages and profits are paid. 
Accordingly, such as the value is, such will be the wages and 
profits of the producers ; but such as are the wages and prof- 
its of producers, such, according to the theory, is the cost of 
production. When, therefore, two commodities exchange for 
each other, or, varying the expression, when their values or 
prices are the same, their costs of production, according to the 
view we are considering, will necessarily be the same. It is 
evident that this argument applies to every case of value and 
price, and is wholly irrespective of the circumstances, whether 
of freedom or monopoly, under which commodities are pro- 
duced. In truth, the principle that " cost of production de- 
termines value" becomes, when thus understood, little more 
than the assertion of an identical proposition, since it merely 
amounts to saying that values are in proportion to the aggre- 
gate of the elements of which they are made up. 

That a doctrine open to objections so fundamental should 
have obtained the currency and prestige which this has ac- 
quired may seem scarcely credible ; and I am in some dread 
lest I should be suspected of misrepresenting the view I am 
combating. But that I have not done so will be admitted on 
consideration of the following sentences occurring in the pas- 
sage quoted above, in which Mr. Mill discloses with perfect 
clearness the line of thought by which the view in question 
has been reached: "What the production of a thing costs to 
its producer, or its series of producers, is the labor expended 
in producing it. If we consider as the producer the capitalist 
ivho makes the advances, the word labor may he replaced hy wages; 
what ike produce costs to him is the wages which he has had to 
pay." In other words, the point of view is shifted from the 
ground of human interests to the partial and limited stand- 
point of the capitalist employer; find the cost of producing an 



52 NORMAL VALUE. 

.article, which really consists in the sacrifices required of hu- 
man beings for its production, is only considered so far forth 
as it is "cost to him," that much more important portion of 
the cost which is cost to the laborer being put altogether out 
of sight. This point of view being once taken, the rest fol- 
lows simply and naturally. What is cost to the capitalist, 
that is to say, his advances, consisting of the profits of previ- 
ous producers as well as of the wages of laborers, profits as 
well as wages, must evidently be included in cost; and not 
only the profits of previous producers, but, in order to meet 
the case of different periods of advancing capital, the profits 
of the producer of the particular commodity whose cost is con- 
sidered — an extension of the theory which involves this curi- 
ous consequence, that among the elements of the cost of pro- 
ducing a commodity is counted the profit obtained on that 
commodity by the producer, a profit which I need scarcely 
say is not realized till after the commodity is produced. Such 
is the line of thought by which the view in question has been 
reached; and it is not difficult to- see why, once adopted, it 
should find easy and general acceptance. The vocabulary of 
commerce is, for obvious reasons, framed almost wholly from 
the capitalist's stand-point; and Political Economy is for the 
most part compelled to draw its nomenclature from the vocab- 
ulary of commerce. A doctrine, therefore, of cost of produc- 
tion which resolved all cost into capitalist's cost would easily 
fall in at once with the general phraseology of economic sci- 
ence, and with the preconceptions and prepossessions gener- 
ated by commercial modes of thought. 

■ That the laborer's share in the industrial sacrifice is by the 
current doctrine excluded from the conception of cost of pro- 
duction does not appear to have been seen, or, if seen, to have 
been adequately appreciated by its adherents. Mr. Mill's lan- 
guage seems to imply that the wages advanced by the capital- 
ist — though he admits they only represent "the cost of pro- 



''COST" AS WAGES AND PROFITS. 53 

ducing to him,^' may yet in some way be taken to represent 
the cost to the laborer also, for, having dealt with this portion 
of the case, he leads on to the next with the words: "Thus 

far of labor or wages, as an element of cost of production 

There is also capital," etc. But I must absolutely deny that 
wages can in any sense be taken to represent the labor element 
in cost of production. Wages, as Mr. Mill observed in the 
passage already quoted, may be regarded as cost to the capi- 
talist who advances them ; though perhaps it would be more 
correct to say that, so far as they go, they measure his cost, 
which really cojisists in the deprivation of immediate enjoy- 
ment implied in the fact of the advance. But to the laborer 
wages are reward, not cost ; nor can it be said that they stand 
in any constant relation to that which really constitutes cost 
to him. If they did, wages in all occupations, in all countries, 
and in all times, would be in proportion to the severity of the 
• toil which they recompensed; whereas the proportion fails, 
not only in different occupations and in different countries, 
but whenever a general advance or decline takes place in the 
conditions of productive industry in the same occupations and 
in the same countries. That it fails in different occupations in 
the same country Mr. Mill himself allows ; rather, let me say, 
he has been the first economist strongly to insist upon the im- 
portance of this fact; that it fails on a comparison of the condi- 
tion of labor in different countries is too obvious to need proof; 
and that it fails in the same country and in the same occupa- 
tions on the occurrence of important changes in the conditions 
of productive industry we may satisfy ourselves by simply ob- 
serving the events now passing before our eyes. The remu- 
neration of labor has for some years been pretty steadily ad- 
vancing in the majority of occupations in this country — ad- 
vancing not merely in its money amount, but in the real re- 
ward it procures for the laborer. And wherever this has hap- 
pened without a corresponding increase in the severity of the 



54 NORMAL VALUE. 

^ toil undergone (and in general it has been accompanied rather 
bj a reduction than an extension of working time), the pro- 
portion between sacrifice and reward has been altered. I re- 
peat, therefore, that not only do wages not constitute the la- 
borer's share in the cost of production, but they can not be 
taken in any sense to represent that cost. Where they are ad- 
vanced by the capitalist they measure, so far as they go, the 

^capitalist's sacrifice, and the capitalist's alone ; and an analysis 
of cost of production, therefore, which takes no account of any 
sacrifices but those represented by wages, simply omits alto- 
gether the most important element of the case. 

§ 4. The point for which I am contending will possibly ap- 
pear to some persons to involve a purely theoretical issue. A 
theoretical issue no doubt is at stake, but I believe a better 
example could not easily be found of the intimate connection 
between theory and practice, and of the way in which an un- 
sound theory can invert for people the true relation of phe- 
nomena and mislead in the practical business of life, than is 
furnished by this doctrine. The truth of this statement will 
only fully appear in the later chapters of this work ; but even 
here I may give an example or two. What, for instance, is 
now the grand argument with the people of the United States 
for the maintenance of protection? Why, the high cost of 
production in that country. And what is the evidence of this 
high cost of production? Simply the high rates of wages 
which prevail. How, they ask, can we, with our high-priced 
labor, compete with the pauper labor of Europe? I must 
frankly own that, accepting the point of view of the current 
theory of cost, I can find no satisfactory reply to this question, 
and I am quite sure that Mr. Wells, who implicitly adopts this 
point of view, has wholly failed to furnish one. But to pursue 
the argument further here would be to anticipate what will come 
more naturally under review at a later stage of our investigation. 



RESULTS OF ERRONEOUS THEORY. 55 

Nor are our commercial writers here entitled to plume them- 
selves on the superiority of their economic notions to those of 
American protectionists, at least as regards this question of 
cost of production. In dealing with the labor question, the 
arguments of our capitalists do not differ in principle from that 
which I have just criticised. Consider, for example, the sig- 
nificance of such passages as this which I find in the work 
of so well-informed and thoughtful a writer as Mr. Brassey, 
and which fairly represents the economic doctrine that per- 
vades it : 

" It is the opinion of Mr. Lothian Bell, one of our highest authorities, 
that, after all the efforts of our iron-masters to contend with the difficul- 
ty of high-priced labor by the improvement of machinery, labor costs 
fifteen per cent, more in England than on the Continent, and this disad- 
vantage, in his opinion, entirely neutralizes the advantages we derive 
from our great facilities in the proximity of our iron-mines to our coal- 
beds. Our workmen are not sufficiently alive to the necessity for the 
exercise of the utmost efforts of ingenuity, in order to enable capital 
invested in England to hold its own in the industrial campaign."* 

Now, I ask, what inversion of the true relations of things 
can be more complete than to represent high-priced labor as 
an obstacle to production in the same sense in which the prox- 
imity of our coal-beds to our iron-mines constitutes a facility? 
Dear labor neutralizing the advantages of our coal-beds and 
iron-mines! As well speak of the large fees reaped by a sue-* 
cessful barrister as neutralizing the advantage of his skill ; for 
not more certainly are the large fees the consequence of the 
barrister's legal skill, than the high wages of our artisans are 
the consequence of the industrial advantages under which they 
work. Now what is the explanation of this singular confusion 
of thought and perversion of facts ? Obviously this — the whole 
problem of industry is looked at exclusively from the capitalist's 

* See "Work and Wages," p. 19. 



56 NORMAL VALVE. 

point of view. " The advantages toe derive " from our coal- 
beds and iron-mines are the advantages which capitalists derive 
from them. " British trade" means capitalists' profits; and, as 
the only cost taken account of in production is the capitalists' 
cost, so naturally the capitalists' remuneration is the only remu- 
neration thought worth attending to. Hence high wages are 
represented as "neutralizing" industrial advantages, as if noth- 
ing were gain which did not come to the capitalist's maw ; and 
Hihe liberal remuneration of the workingrpeople is deplored as a 
national calamity because it sets limits to the capitalist's share 
in the produce of their joint exertions. " Dear labor," says Mr. 
Brassey (p. 142), summing up the argument of a chapter, "is 
now the great obstacle to the extension of British trade."* It 
does not occur to him that high profits are an obstacle in pre- 
cisely the same sense. If British laborers and capitalists will 
only consent to accept a lower scale of remuneration for their 
services they may have the satisfaction of indefinitely extend- 
ing British trade and achieving the great goal of commercial 
ambition by underselling all the nations of the earth. Each, 
however, halts, and would prefer that the other should take 



* I can not resist quoting the sentence which follows : " But we see how cheap 
labor at the command of our competitors [continental capitalist emplojei's] seems 
to exercise the same enervating influence as the delights of Capua on the soldiers 
of Hannibal " (p. 142). To which this, from the Times's money article, may serve 
as a pendant: "It must be borne in mind that no discovery of fresh supplies [of 
coal], either in Europe or America, would cause any decisive benefit, because the 
present difficulty in those parts of the world is not from want of coal, but from 
want of labor. .... The ^ast is the only quartev where labor is untrammeled ; 
and it would be interesting to the English public to learn, as far as the coal ques- 
tion is concerned, why, in a British settlement, where labor and material are both 
in abundance, nothing can be accomplished to mitigate an evil which promises to 
become one of the most serious ever inflicted upon the industry of civilized na- 
tions. " It is not clear whether the evil deprecated is the scarcity of coal or the 
high price of British labor ; but, from the point of view both of the Times and of 
Mr. Brassey, these would both be evils of the same order. 



THEORY OF COST OF PRODUCTION. 57 

the initiative in the patriotic sacrifice, desiring, like the French 
soldiers at the battle of Fontenoj, to give to his opponent the 
honor of firing first. 

§ 5, It seems to me that a sufficient case has now been made 
out to justify an attempt at a fresh exposition of the doctrine 
of Cost of Production. I therefore proceed to submit to the 
reader that view of it which such reflection as I have been 
able to give to the subject has led me to form. 

And here I must, in the first place, insist that cost means 
sacrifice, and can not, without risk of hopelessly confusing 
ideas, be identified with any thing that is not sacrifice. It 
represents what man parts with in the barter between him and 
nature, which must be kept eternally distinct from the return 
made by natuje on that payment. This is the essential nature 
of cost ; and the problem of cost of production as bearing on 
the theory of value is to ascertain how far and in what way\ 
the payment thus made by man to nature in productive indus- 
try determines or otherwise influences the exchange value of 
the products which result. To find an answer to this question 
we need not go beyond that fundamental principle of conduct 
which leads men to seek their ends by the easiest and shortest 
means. The end of engaging in industry is the acquisition of 
wealth ; and the means, self-denial, toil, forethought, vigilance. 
The problem of industry is, therefore, to attain wealth at the 
least expenditure of those bodily and mental exertions — or, as 
we may say, at the least sacrifice or cost. And the law of cost 
of production, as governing value, is merely the practical con- 
sequence and outcome of the pursuit of wealth under this con- 
dition. 

In order to perceive this, it is only necessary to keep stead- 
ily in view the two following facts: First, that under the influ- 
ence of the motive just indicated, men, in selecting their occu- 
pations, whether as laborers or as capitalists, will, sofai^ cui iJiey 



58 NORMAL VALUE. 

have the power of choice, select those which, in return for a given 
sacrifice, yield, or promise to yield, the largest rewards ; and 
secondly, the fact that, under a system of separation of employ- 
ments, industrial rewards consist for each producer, or, more 
properly, for each group of producers, employed on a given 
work, in the value of the commodities which result from their 
exertions. I say in the value of the commodities, not in the 
commodities themselves; for it is not always that the man who 
is engaged in industry needs the particular commodity on which 
his own exertions are bestowed, and it is seldom that he needs 
more than at most an insignificant quantity of what he pro- 
duces; consequently his remuneration must come, not from 
the direct but from the indirect results of his labors — from 
those things, whatever they are, which the commodity he pro- 
duces enables him by sale and purchase to command — in 
other words, from its value. Given the productiveness of a 
man's industry, this alone will not enable us to determine the 
amount of his remuneration. In order to this, we must fur- 
ther know the proportions in which what he produces will ex- 
change for what he wants — that is to say, for the articles of 
his consumption. The value of the product resulting from in- 
dustry forms thus the source from which, under the actual 
state of things, industry is remunerated. Nor is this conclu- 
sion invalidated by the fact that, under the industrial organiza- 
tion prevailing in this and other civilized countries, the laborer 
commonly receives his reward in the form of wages advanced 
by the capitalist before the product is completed ; since what 
he receives is subsequently recouped to the capitalist, the sum 
being drawn from the value of the product; so that it is still 
the value of the product from which the remuneration of all 
concerned in the creation of that product ultimately comes. 
Wages and profits in each branch of industry are thus derived 
from the value of the commodities proceeding from that branch 
of industry, and, as (with the exception of the case where rent 



IMPLIES FREE COMPETITION. 59 

is also an element in the value of commodities — a case which, 
those acquainted with the economic theory of rent will per- 
ceive, does not affect the general argument) wages and profits 
also absorb the whole of that value, it follows that, other 
things being the same, the aggregate of wages and profits re- 
ceived by any given group of producers will always vary with 
the value of the aggregate of commodities which they pro- 
duce. Where wages and profits, therefore, in different occu- 
pations are in proportion to the sacrifices undergone, the 
value of the commodities proceeding from those occupations 
will also be in proportion to the same sacrifices, that is to 
say, the commodities will exchange in proportion to their^ 
costs of production. Now wages and profits will be in pro- 
portion to the sacrifices undergone wherever, and only so far 
as, competition prevails among producers — wherever, and so ', 
far only as, laborers and capitalists have an effective choice in j 
selecting among the various occupations presented to them in J^ 
the industrial field. Give them this effective choice, and the 
correspondence of remuneration to sacrifice, not indeed in ev- 
ery act of production, but as a permanent and continuing state 
of things, is secured by the most active and constant of human 
motives. Each competitor, aiming at the largest reward in 
return for his sacrifices, will be drawn toward the occupations 
which happen at the time to be the best remunerated; while 
he will equally be repelled from those in which the remunera- 
tion is below the average level. The supply of products pro- 
ceeding from the better paid employments will thus be in- 
creased, and that from the less remunerative reduced, until 
supply, acting on price, corrects the inequality, and brings 
remuneration into proportion with the sacrifices undergone. 
Competition, therefore, is at once the security for the corre- 
spondence of industrial remuneration with sacrifice, and also, 
and because it is so, the security for the correspondence of the 
values of commodities with the costs of their production. 



60 NORMAL VALUE. 

■^ [• The indispensable condition to the action of cost of produc- 
tion as the regulator of normal values is thus the existence 
I of an effective competition among those engaged in industrial 
pursuits ; and the point to which we have now to turn our at- 
tention is the extent to which such effective competition is 
.actually realized in industrial communities. Confining our at- 
tention for the present to England, we find competition here 
active and widely prevalent. In trade, as distinguished from 
industry, I mean in the buying and selling of commodities as' 
distinguished from their production, it may be said to be uni* 
versal and unlimited. Every one is at liberty, and not only 

• at liberty, but in general has the practical power, to sell his 
commodity,* whatever it may be, in any market in the coun- 
try. Again, every one, speaking broadly, is free, so far as 
the law is concerned, to engage in any industrial pursuit he 
pleases, from hedging and ditching up to the learned profes- 
sions. But for the present purpose something more than this 
is necessary./ Not only must there be for dealers the right 
/ and power of selling the commodity where they please, and 

■ for workmen the legal right of admission to whatever occupa- 
tion each prefers, but there must be, for laborers and capital- 
ists respectively, the practical power of employing their labor 
and capital in whatever direction each may please — in a word, 
an effective choice in deciding on the destination of the in- 
strument of which they have each to dispose. It matters not 
what the obstacle may be to the effectiveness of the choice, 
whether law, ignorance, or poverty — if there be an obstacle, if 
the producer can not pass freely from the less to the more lucra- 
tive occupation, competition is defeated,\so far as regards the re- 
quirements of the law of cost,' since there can be no security 



* I say his "commodity," not his "service." The grounds for not including 
labor and commodities in the same category, in an exposition of the theory of 
value, will be found stated further on (part ii., chap. i.). 



COMPETITION, HOW FAB EFFECTIVE. 61 

under such circumstances that remuneration shall be brought 
into correspondence with sacrifice. This is the sort of com- 
petition through which cost of production, as a regulator of 
value, works; and the question is, How far does competition 
in this sense prevail in this and other industrial communities ? 
There is a school of reasoners who will not hesitate to an- 
swer this question by flatly denying the existence of competi- 
tion at all in the sense defined. I shall be told that the as- 
sumption so readily made by economists, that capital and labor 
may be shifted about from one occupation to another in search 
of the highest remuneration, is a mere figment of the econom- 
ical brain, without foundation in fact. Once embodied in a 
form suited to actual work, capital, it will be urged, is for the 
most part incapable of being turned to other uses. The build- 
ings, plant, and material required for one kind of manufacture 
can rarely be adapted to any other, and, even where the con- 
version is possible, the process will only be accomplished at 
great expense and loss. The difficulty of transferring labor, it 
will be contended, is even greater, since we are here in contact 
with mental as well as physical obstacles. Industrial skill is 
not a thing to be acquired in a moment, and that which a man 
possesses is the result, in general, of considerable time and out- 
lay devoted to its acquisition. Is it likely that, having spent 
his time and money in acquiring this skill and fitting himself 
for a particular occupation, a workman will desert the line of 
life he has chosen on the first sign of an advance in remunera- 
tion elsewhere? We are reminded how long the hand-loom 
weavers persisted in their unprofitable labors after power-looms 
were in general use ; and we can imagine how extreme the 
case would be which would cause a carpenter to become a 
smith, or a smith a carpenter, still more, which woyld cause ei- 
ther to take to hair-dressing or tailoring. On such grounds, 
it has been contended that competition, such as I have defined 
it as necessary to the action of the principle of cost, has no real 



62 NORMAL VALUE. 

existence, and that consequently all theories assuming its ex- 
istence fall to the ground. Alike with regard to capital and 
labor, it is held that either, once embarked in a particular em- 
ployment, is practically committed to that employment, and 
may therefore be regarded as taken out of the field of compe- 
tition with agents of the same kind engaged in other branch- 
es of industry. I am anxious to do the fullest justice to the 
quantum of truth contained in this argument, and I admit at 
once that the facts alleged are substantially true. But I think 
it will not be difficult to show that they by no means sustain 
the practical conclusion they are adduced to support, and that, 
taking account of other conditions of the case which the argu- 
ment overlooks, they are perfectly compatible with the exist- 
ence of an effective industrial competition. 

In the first place, it may be remarked that, in order to secure 
an efiective industrial competition — such a competition as shall 
bring rewards into correspondence with sacrifices — it is not 
necessary that every portion of capital, or that every laborer, 
should be at all times capable of being turned to any selected 
occupation. It is enough that a certain quantity of each agent 
— varying according to circumstances — should be thus disposa- 
ble. Suppose some branch of industry to be specially flourish- 
ing and to be realizing exceptional gains, there is no need that 
the whole industry of the country should be disturbed to cor- 
rect the inequality. A small diversion of capital and labor — 
small, I mean, in comparison with the aggregate embarked in 
any important industry — will in general suffice for the pur- 
pose. Even on extraordinary occasions, when unlooked-for 
events in the political or commercial world disturb ordinary 
calculations and give an enormous advantage to particular in- 
dustries — such occasions, for example, as occurred in the early 
years of railway enterprise, or again in the linen trade on the 
breaking out of the American civil war — even on such occa- 
sions, the equilibrium of remuneration and cost can always be 



COMPETITION, HOW FAR EFFECTIVE. 63 

restored, not indeed in a moment, but after no long delay, 
through the action of labor and capital still uncommitted to 
actual industrial employment, and without any sensible en- 
croachment on the stock already actively employed. All that 
is necessary, therefore, with a view to an effective industrial 
competition, is the presence in a community of a certain quan- 
tity of those instruments of production existing in disposable 
form, ready to be turned toward the more lucrative pursuits, 
and sufficiently large to correct inequalities as they arise. 
Now, it will not be difficult to show that this condition is ful- 
filled in many industrial communities, completely in the case 
of capita], and less perfectly, but still within certain limits real- 
ly and effectually, in the case of labor also. 

The existence of a large amount of capital in commercial 
countries in disposable form — or, to speak less equivocally, in 
the form of money or other purchasing power, capable of being 
turned to any purpose required — is a patent and undeniable 
fact. Nor is it less certain that this capital is constantly seek- 
ing the best investments, and rapidly moves toward any branch 
of industry that happens at the moment to offer special attrac- 
tions.* It is plain, too, that the capital thus disposable is suffi- 

* "Political economists say that capital sets toward the most profitable trades, 
and that it rapidly leaves the less profitable and non-paying trades. But in ordi- 
nary countries this is a slow process, and some persons, who want to have ocular 
demonstration of abstract truths, have been inclined to doubt it because they could 
not see it. In England, however, the process would be visible enough if you could 
only see the books of the bill-brokers and the bankers. Their bill-cases, as a rule, 
are full of the bills drawn in the most profitable trades, and cceteris paribus and in 
comparison empty of those drawn in the less profitable. If the iron trade ceases 
to be as profitable as usual, less iron is sold; the fewer the sales the fewer the bills; 
and in consequence the number of iron bills in Lombard Street is diminished. On 
the other hand, if in consequence of a bad han-est the com trade becomes on a sud- 
den profitable, immediately ' corn bills ' are created in great numbers, and if good, 
are discounted in Lombard Street. Thus English capital runs as surely and in- 
stantly where it is most wanted, and where there is most to be made of it, as water 
runs to find its level." — "Lombard Street," p. 13, by "Walter Bagehot. 



64 NORMAL VALUE. 

cient for the purpose we have here in view, namely, to ren- 
der competition effective among the various industries ; since 
we find a portion of it constantly moving abroad for foreign 
investment — a destination it would scarcely receive while there 
was a prospect of reaping exceptionally high returns from in- 
vestment within the country. We have, therefore, in the exist- 
ence of this fund all that is required for a practically effective 
competition, so far as one instrument of production is concern- 
ed, and this without necessitating any serious encroachment 
on the capital actually engaged in productive operations. But 
is the corresponding condition satisfied in the case of labor? 
A little consideration will show that, within certain limits and 
subject to certain qualifications, it is fulfilled in this as well. 

For here also we have a disposable fund, capable of being 
turned, as remuneration may tempt, in various directions. 
Granted that labor, once engaged in a particular occupation, 
is practically committed to that species of occupation ; all la- 
bor is not thus engaged and committed. A young generation 
is constantly coming forward, whose capabilities may be re- 
garded as still in disposable form, fulfilling the same function 
in relation to the general labor force of the country which 
capital, while yet existing as purchasing power, discharges in 
relation to its general capital. The young persons composing 
this body, or others interested in their welfare, are eagerly 
watching the prospects of industry in its several branches, and 
will not be slow to turn toward the pursuits that promise the 
largest rewards. Individual tastes, no doubt, will go for some- 
thing in the decision, but varieties of tastes, taken over a large 
area, may be assumed pretty well to balance each other ; and 
there will remain a steady gravitation of disposable labor to- 
ward the more remunerative callings. On the .other hand, 
while fresh labor is coming on the scene, worn-out labor is 
passing off; and the departments of industry, in which remu- 
neration has from any causes fallen below the average level, 



COMPETITION, HOW FAB EFFECTIVE. 65 

ceasing to be recruited, the numbers of those employed in them 
■will quickly decline, until supply is brought within the limits^ 
of demand, and remuneration is restored to its just proportions. -^ 
In this way, then, in the case of labor as in that of capital, the 
conditions for an effective competition exist, notwithstanding 
the practical difficulties in the way of transferring labor, once 
trained to a particular occupation, to new pursuits. But, as I 
have already intimated, the conditions are in this case realized 
only in an imperfect manner, and this involves, as a conse- 
quence, certain limitations on the action of competition in the 
labor market, and certain corresponding effects on the values 
of commodities. Wliat the nature of those limitations are I 
shall now proceed to point out. 

I remarked just now that the youthful labor constantly com- 
ing forward to recruit the labor market might be compared to 
the capital still existing in the form of purchasing power, and 
ready to be applied to any occupation, according as the pros- 
pect of profit might determine. In one important respect, 
however, the analogy fails. Of the capital existing in this dis- 
posable form any portion may be applied to any industrial pur- 
pose. But of the disposable labor each element — that is to say, 
each individual laborer — can only choose his employment with- 
in certain tolerably well-defined limits. These limits are the 
limits set by the qualifications required for each branch of trade 
and the amount of preparation necessary for their acquisition. 
Take an individual workman whose occupation is still undeter- 
mined, he will, according to circumstances, have a narrower or 
wider field of choice ; but in no case will this be co-extensive 
with the entire range of domestic industry. If he belongs to the 
class of agricultural laborers, all forms of mere unskilled labor 
are open to him, but beyond this he is practically shut out from 
competition. The barrier is his social position and circum- 
stances, which render his education defective, while his means 
are too narrow to allow of his repairing the defect, or of defer- 

5 



.66 NORMAL VALVE. 

ring the return upon his industry till he has qualified himself 
for a skilled occupation. Mounting a step higher in the in- 
dustrial scale — to the artisan class, including with them the 
class of small dealers whose pecuniary position is much upon 
a par with artisans, here also within certain limits there is com- 
plete freedom of choice, but beyond a certain range practical 
exclusion. The man who is brought up to be an ordinary car- 
penter, mason, or smith, may go to any of these callings, or a 
hundred more, according as his taste prompts, or the prospect 
of remuneration attracts him ; but practically he has no power 
to compete in those higher departments of skilled labor for 
which a more elaborate education and larger training are nec- 
essary, for example, mechanical engineering. Ascend a step 
higher still, and we find ourselves again in presence of similar 
limitations: we encounter persons competent to take part in 
any of the higher skilled industries, but practically excluded 
from the professions. It is true, indeed, that in none of these 
cases is the exclusion absolute. The limits imposed are not 
such as may not be overcome by extraordinary energy, self- 
denial, and enterprise; and by virtue of these qualities indi- 
viduals in all classes are escaping every day from the bounds 
of their original position, and forcing their way into the ranks 
of those who stand above them. All this, no doubt, is true. 
But such exceptional phenomena do not affect the substantial 
truth of our position. What we find, in effect, is, not a whole 
population competing indiscriminately for all occupations, but 
a series of industrial layers, superposed on one another, within 
each of which the various candidates for employment possess 
a real and effective power of selection, while those occupying 
the several strata are, for all purposes of effective competition, 
practically isolated from each other. We may perhaps vent- 
ure to arrange them in some such order as this: first, at the 
bottom of the scale there would be the large group of unskill- 
ed or nearly unskilled laborers, comprising agricultural labor- 



NON-COMPETING GROUPS. 67 

ers, laborers engaged in miscellaneous occupations in towns, or 
acting in attendance on skilled labor. Secondly, there would 
be the artisan group, comprising skilled laborers of the second- 
ary order — carpenters, joiners, smiths, masons, shoe - makers, 
tailors, hatters, etc., etc., with whom might be included the 
very large class of small retail dealers, whose means and po- 
sition place them within the reach of the same industrial op- 
portunities as the class of artisans. The third layer would con- 
tain producers and dealers of a higher order, whose work would 
demand qualifications only obtainable by persons of substantial 
means and fair educational opportunities — for example, civil 
and mechanical engineers, chemists, opticians, watch-makers, 
and others of the same industrial grade, in which might also 
find a place the superior class of retail tradesmen ; while above 
these there would be a fourth, comprising persons still more 
favorably circumstanced, whose ampler means would give them 
a still wider choice. This last group would contain members 
of the learned professions, as well as persons engaged in the 
various careers of science and art, and in the higher branches 
of mercantile business. The reader will not understand me as 
offering here an exhaustive classification of the industrial pop- 
ulation. I attempt nothing of the kind; but merely seek to 
exhibit in rough outline the form which industrial organiza- 
tion, under the actual conditions of modern life, tends to as- 
sume; my object being, by putting the fact in a concrete 
shape, to furnish help toward a more distinct apprehension 
of the limitations imposed by social circumstances on the free 
competition of labor than would be obtained from more gen- 
eral statements. As I have already said, I am far from con- 
tending for the existence of any hard lines of demarkation be- 
tween any categories of persons in this country. No doubt 
the various ranks and classes fade into each other by imper- 
ceptible gradations, and individuals from all classes are con- 
stantly passing up or dropping down ; but while this is so, it 



68 NORMAL VALUE. 

is nevertheless true that the average workman, from whatever 
rank he be taken, finds his power of competition limited for 
practical purposes to a certain range of occupations, so that, 
however high the rates of remuneration in those which lie be- 
yond may rise, he is excluded from sharing them. We are 
thus compelled to recognize the existence of non-competing in- 
dustrial groups as a feature of our social economy ; and this is 
the fact which I desire here to insist upon. It remains to be 
considered how this organization of industry is calculated to 
modify the action of the principle of cost of production. 

The reader will remember that there are two distinct sac- 
rifices undergone in the business of production — the sacrifice 
of the capitalist, and the sacrifice of the laborer. As regards 
the former, the competition of capital being, as we have seen, 
effective over the entire industry of each commercial country, 
it follows that so much of the value of commodities as goes to 
remunerate the capitalist's sacrifice, and which may be regard- 
ed as the " profit fund," will correspond throughout the range 
of domestic industry with that portion of the cost which falls 
to the capitalist. The defalcation from the principle of cost 
occurs not here, but in that other and larger element in the 
Talue of commodities which goes to remunerate the laborer. 
The nature of the failure may be thus described : The ex- 
change of all commodities produced by laborers belonging to 
the same industrial group, or competing circle, will be govern- 
ed by the principle of cost — this results necessarily from the 
fact that competition is effective within such groups or cir- 
cles ; but the exchange of commodities produced by laborers 
belonging to different groups or competing circles will, for the 
opposite reason, not be governed by this principle. Thus all 
the products of unskilled labor will exchange for each other 
in proportion to their costs ; as will also all the products of 
ordinary artisan labor as among themselves. But the latter 
products will not exchange against the former in proportion 



LIMITATION OX THE LAW OF COST. 69 

to their costs, nor will the products of artisan labor, or of un- 
skilled labor, exchange in proportion to their costs against 
those of the higher industrial groups. The price of a deal 
table and the price of a common lock will be found to corre- 
spond to the sacrifices actually undergone by their producers ; 
or again, the price of a barometer and the price of a watch will 
be found to correspond to the same conditions ; but if we com- 
pare the price of either of the latter commodities with that of 
either of the former, we shall find that the correspondence fails; 
the prices of the barometer and of the watch will bear a far 
larger proportion to their respective costs than those of the 
deal table, or of the common lock, to theirs. If any one ques- 
tions the fact, the evidence is to be found in the relative re* 
muneration of the producers of the several articles. That re* 
muneration, as I have shown, comes from the price of the com- 
modity in each case ; but, while it is in proportion to the rela- 
tive sacrifices of production in the case of the workmen who 
are in competition with each other, it is not in proportion to 
those sacrifices where the workmen are excluded from mutual 
competition. The result, then, is that the principle of cost of 
production controls exchange value in the transactions taking 
place within certain limited industrial areas ; while, in the re- 
ciprocal dealings of those several areas with one another, its 
operation fails. 

This is the principal modification suffered by cost of produc- 
tion in consequence of the circumstance we are considering. 
In reality, however, the effects of that state of things are a 
good deal more complex than would appear from the state- 
ment just made; for in that statement account was not taken 
of the fact that the same commodity is very frequently the 
product of labor belonging to different industrial circles. For 
example, a house is mainly produced by masons, brick-layers, 
carpenters, plasterers, and others, who would all rank in the 
class of artisans ; but a considerable quantity of purely un- 



70 NORMAL VALUE. 

skilled labor is also employed in attendance upon these, as 
labor of a higher degree of skill than that of the ordinary ar- 
tisan is employed in the finishing and decoration of the house. 
Now suppose a commodity of this kind, the joint production 
of workmen of different orders, to be exchanged against one 
produced by workmen belonging to some one industrial group, 
or to several groups, but in proportions different from those 
obtaining in the other case, what principle would here govern 
exchange value, or — to express the conception in a more fa- 
miliar form — the relative prices of the commodities? Mani- 
festly more than one principle will be engaged in determining 
the result. So far as the two commodities are the products of 
workmen in competition with each other, their values will be 
governed by cost of production, but so far as they proceed 
from workmen not in mutual competition, they will be gov- 
erned by that other principle, yet to be ascertained, which 
gaverns normal value in- the absence of competition. Sup- 
posing the commodity with which a house is compared were 
produced exclusively by the artisan class, the cost principle 
would be mainly operative in determining the exchange rela-^ 
tion; but it would not be entirely so, since a portion, though 
a small portion, of the house has been produced by workmen 
not in competition with the producers of the other article. On 
the other hand, if the comparison were made between a house 
and a commodity produced either wholly by unskilled labor, 
or wholly by labor of a degree of skill superior to that of or- 
dinary artisan labor, the relative values would follow, but in a 
slight degree, the rule of cost of production, being mainly con- 
trolled by the principle prevailing in the absence of the condi- 
tions which secure the action of cost. This example will serve 
to show the great complication that arises in the relative values 
of commodities under the actual conditions of their production. 
And if we bear in mind that all manufactured commodities are 
produced from raw materials which are very frequently the 



LIMITATION OF THE LAW OF COST. 71 

product of workmen not in competition with those who per 
form the manufacturing process, we shall see how widely the 
range of this sort of complication extends. Still we must not 
exaggerate its importance. What mainly happens is, that the 
bulk of the value of each commodity follows one law — say the 
law of cost, or what we shall afterward find to be the law of 
reciprocal demand, while a small remaining element is govern- 
ed by a different principle. Thus, reverting for a moment to 
a previous illustration, a barometer and a watch are in very 
large proportion the products of workmen of a high order of 
skill, and in industrial competition with each other; in a very 
insignificant degree, of workmen of an inferior order : as, on 
the other hand, a deal table and a common lock are mainly the 
products of ordinary artisan labor, though, it may be in some 
small degree, also of labor not in competition with the labor 
of artisans. In so far, however, as any portion of the labor 
employed on the barometer is out of competition with some 
portion of that employed on the watch, and in so far as the 
same is true of the labor employed on the other compared ar- 
ticles, to that extent we were not justified in asserting that the 
commodities in question exchanged, either pair of them, in pro- 
portion to their costs of production. Nevertheless, it is certain 
tha,t our statement was substantially true, since the chief por- 
tion, and so much the chief portion as to be nearly the whole, 
of the labor employed on each pair fulfilled the required con- 
dition ; and this would govern a corresponding proportion of 
their values. A similar qualification would be needed in the 
case of most assertions of a like nature. In strictness, we can sel- 
dom say that the values of two commodities are in their whole 
extent governed by their costs of production : we can only say 
that they are so mainly, and in their chief elements. In effect 
the point in question is of little more than theoretic importance. 
As a point of theory it is proper to notice it, but the circumstance 
it deals with has little sensible effect upon the facts of exchange. 



73 NORMAL VALUE. 

The mode in which the cost of producing commodities op- 
erates in regulating their values has now, I trust, been made 
tolerably clear. It will probably have been observed, that as 
I have departed from the current doctrine in my view of the 
elements of cost, so also have I departed from it in my manner 
of representing the operation of the law. That law is ordina- 
rily regarded as a principle governing value universally wher- 
ever it affects value at all — governing, that is to say, the value 
of certain classes of commodities in all exchanges; so that, the 
conditions of their production being known, the law of their 
value is supposed to be known, whatever may be the nature 
or the conditions of production of the commodities against 
which they are exchanged. For example, the price of calico 
would commonly be said to be governed by its cost of produc- 
tion, and this would be laid down without any limitation as to 
the article which might form the other member in the ex- 
change. If, however, the exposition contained in the forego- 
ing pages be sound, this conception of the law can not be cor- 
rect. For what has there appeared is a tendency in commodi- 
ties to exchange in proportion to their costs of production only 
so far as there exists free competition among their producers. 
The exchange, therefore, in proportion to cost would only take 
place within the limits of the field of free competition ; and a 
commodity produced within this field, but exchanged against 
one produced by workmen from beyond it, would not in such 
case exchange in proportion to its cost of production. Sup- 
posing, for example. A, B, C, D, E, F, to be commodities, the 
producers of which are all in free- competition with each other, 
such commodities would exchange among themselves in pro- 
portion to their costs. Again, supposing X, Y, Z, to be com- 
modities produced by workmen also in free competition with 
each other, but excluded from competing with those who had 
produced A, B, C, D, etc. ; here again the values of X, Y, Z, in 
the exchanges of these commodities against each other would 



NATURE OF THE LAW OF COST. 73 

be governed by the principle of cost. But now suppose the 
exchange to be made of a commodity belonging to the former 
category against one belonging to the latter — value would in 
this case be no longer governed by cost of production, inas- 
much as there was no longer free competition among those 
who had produced the commodities exchanged. Now if the 
reader will recall the description that has been given of the 
various non-competing groups of which our industrial system 
is made up, he will perceive that the case last supposed repre- 
Bents no inconsiderable proportion of all the exchanges which 
take place within such a country as this ; and that, therefore, 
the action of cost of production in regulating value is by no 
means as extensively prevalent, even within the limits of the 
same country, as the current theory would lead us to suppose. 
The same commodity follows the law of cost of production in 
some exchanges and does not follow it in others ; nor is it true 
that the value of any commodity conforms to the principle 
of cost in all exchanges. In order that this should happen, 
effective competition should be established among producers 
over the entire field of industry — a condition which, I need 
hardly say, is very far yet from being anywhere fulfilled. 
The true conception of the law of cost is thus, not of a law 
governing universally the values of any class of commodities, 
but that of one governing the values of certain commodities in 
certain exchanges. 

§ 6. In what has gone before, cost of production has been 
discussed without more than a passing reference to the nature 
of the elements which compose it. There was no need to dis- 
criminate those elements with particularity while we were oc- 
cupied in establishing the general principle, but the evidence 
for that princfple having now been set forth, it will be desira- 
ble to attempt some analysis and characterization of the con- 
stituents of cost 



74 NORMAL VALVE. 

There can not be much difficulty in determining the princi- 
pal elements of cost of production, once we have firmly seized 
the fact that, as cost means sacrifice and not reward, so cost 
of production means the sacrifice involved in production — in 
the act or acts of rendering certain objects supplied by nature 
fitted for human purposes, not the beneficial result or return 
upon such acts. This sacrifice, so soon as industry has passed 
its most primitive stage, assumes two distinct forms — first, that 
involved in the physical or mental exertion incident to taking 
part personally in the work of production, which we may call 
\ briefly the sacrifice of "labor;" and, secondly, that involved in 
supplying the, prerequisites, of productive. operations, or capi- 
tal— %form of sacrifice which is conveniently expressed by the 
'^erm '' abstinence."; These are t.he- principal kinds of sacrifices: 
inv9lved in prpd,uctive industry ; but there is also a third, the 
liability, namely, of producers to certain evils over and above: 
the usual and calculable sacrifices incident to their work, which 
we may call " risk." There is no reason in the nature of things' 
that these several sacrifices should not be undergone by the 
same person, that is to say, that the same person should not be- 
at once laborer and capitalist, and also incur all the risk of the 
industrial operation ; and in point of fact this arrangement has 
place more or less in every country, and in some countries, 
especially those in which peasant proprietorship prevails, to a 
great extent. In England, however, and in all the non-agri- 
cultural industry of most civilized countries, the sacrifices of 
Labor and abstinence are, for the most part, undergone by dis- 
tinct classes, who are named, accordingly, laborers and capi- 
talists. : The sacrifice of risk, on the other hand, falls on both 
classes of producers alike, though the nature of the risk differs 
according as it afiects one or the other. Affecting the capital- 
ist, it is risk to his property ; affecting the laborer, it is risk to 
his bodily and mental faculties or life, but in either case it is 
an element of cost ; being a real sacrifice incurred by a pro- 



^ THE LABOR ELEMENT. 75 

ducer, and demanding consequently a corresponding compen- 
sation in the value of the product,* 

Our analysis, then, of cost of production resolves it into three 
principal elements, which, I may remark, are also ultimate ele- 
mentsf — Labor, Abstinence, and Eisk; the first, under the 
prevailing industrial arrangements of this and other civilized 
countries, borne by the laborer, in that enlarged sense of the 
term in which "laborer" includes all who take a personal part 
in the business of production; the second by the capitalist; 
the third falling upon laborer and capitalist alike. A few re- 
marks on each of these elements will suffice for my present 
purpose. 

Considering labor as an element of cost of production, the 
principal remark that seems called for is that, in estimating it 
in this character, three circumstances, and three circumstances 
only, must be taken account of — namely, the duration of the 
exertion, the degree of its severity or irksomeness, and the risk 
or liability to injury of any kind attending it. As commodi- 
ties differ greatly more in the duration of the exertion, or the 
quantity of the labor required for their production, than in the 
severity of this labor or the risk attending it, the former is ob- 
viously the most important circumstance in the case, and it 
was to it alone that Ricardo, in his analysis of cost, had re- 

* In the usual exposition of the doctrine of cost of production the only risk taken 
account of is that incurred by the capitalist ; but this is merely a consequence of 
that habit of contemplating the work of production exclusively from the capital- 
ist's stand-point, of which I have already spoken. 

t As I understand the word, "an ultimate element" in the subject-matter of 
any science is either an element which in the actual state of knowledge does not 
admit of being farther resolved, or one the resolution of which belongs to some 
other department of knowledge. In this sense labor, abstinence, and risk are ul- 
timate elements in Political Economy, since, though they all admit of being traced 
to prior conditions and so "explained," the task of performing this process falls 
within the province of other sciences. In what sense profits and wages can, in 
any case, be considered ultimate elements of cost I am at a loss to understand. 



76 NORMAL VALUE. 

gard ; but manifestly his exposition was in this respect defect- 
ive. The labor employed in producing different commodities 
differs in severity and in liability to accident as well as in mere 
quantity, and, in proportion as it is more severe or more lia- 
ble to accident, implies, other things being the same, a greater 
sacrifice, and therefore a larger cost. This greater sacrifice will 
require corresponding compensation, which, as in other cases, 
can only be furnished from the value of the product. Com- 
modities, accordingly, will exchange — if we confine our atten- 
tion to the labor element of cost — not simply in proportion to 
the quantity of labor employed in their production, but in pro- 
portion to this multiplied by the severity of the labor or the 
risk attending it. When, however, we have taken account of 
quantity, irksomeness, and risk, we have taken account of ev- 
ery incident in virtue of which labor is an element of cost of 
production, and affects through this principle the value of com- 
modities. 

It will be observed that in the brief analysis just given I 
have not taken any account of skill as an incident of labor en- 
tering into the cost of production. In making this omission, I 
have no doubt I shall be considered by many to have omitted 
a principal element of the case. Nevertheless, I must main- 
tain that skill, as skill, is no part of the cost of production, 
and I add, that no article is dearer than another simply in vir- 
tue of the skill bestowed upon it. Let me explain. Skill, I 
say, is no element of cost, but it may be, and generally is, an 
indication of that which is an element of cost — namely, the 
sacrifice, whether in the form of labor or abstinence, under- 
gone in acquiring the skill. Now, so far as skill is the prod- 
uct of such sacrifice, it undoubtedly represents an element of 
the cost of production ; but the point to be attended to is, that 
the addition thus made to the cost of production is in propor- 
tion, not to the skill, but to the sacrifice necessary to the 
acquisition of the skill. As a matter of fact, the products of 



RELATION OF SKILL TO " COST." 77 

most kinds of skilled labor exchange against those of unskill- 
ed in a proportion much more favorable to the former than 
cost of production, as I have defined the doctrine, would pre- 
scribe. But this does not prove that skill is an element of 
cost ; because it will be found that, where the products of 
skilled labor command these high terms of exchange, the con- 
ditions of production are not those in which cost of produc- 
tion would govern value ; in other words, the result in ques- 
tion only occurs where skilled labor represents a monopoly. 
If we desire evidence of the powerlessness of skill, as such, to 
affect the value of commodities, we have only to consider the 
very low prices which many works of the highest literary and 
scientific excellence fetch, as compared with products of a far 
lower degree of skill. The eminent skill embodied in such 
works does not prevent their selling at a price far below their 
cost of production, as measured by the prices of commodi- 
ties representing skill of a different order; and if in other in- 
stances the products of skill command prices far above what 
the law of cost would prescribe, no more is this elevated value 
due to the skill which such products represent, but to the circum- 
stances which limit the possession of this skill to a small num- 
ber of persons as compared with the demand for their services.* 

* The reader will observe that the doctrine here laid down as to the relation of 
skill to the value of commodities and, as depending on this, to the relative remu- 
neration of serjices, relates to skill of different kinds as existing in the different 
departments of industry. Within the limits of the same trade or profession dif- 
ferences of skill will, in general, under free competition, be accompanied with 
coiTesponding differences of remuneration. What the capitalist employing labor 
looks to is not the labor, but the result ; and, consequently, where two inferior 
workmen only produce the same result as one of superior skill, it will be worth his 
while to pay the latter double what he could afford to pay either of the former. 
Relative wages, therefore, within the same occupation, will, where competition pre- 
vails, be, in general, pretty accurately adjusted to the different degrees of skill : 
in different occupations — and it is only with these, as furnishing the occasion of 
exchange, that a theory of value has to do — they will be affected by skill only in 
the manner pointed out in the text. 



78 NORMAL VALUE. 

The true relation between skill and value may be expressed 
in the following propositions : 

First, skill, as skill, produces no effect upon value ; in other 
words, commodities do not under any circumstances exchange 
for each other in proportion to the degree of skill bestowed 
upon them. Secondly, skill, though in itself inoperative on 
value, nevertheless affects it indirectly in two distinct ways: 
first, where competition is effective among producers, through 
the cost which must be undergone in acquiring the skill — in 
such cases the value of skilled products will, coeteris paribus^ 
exceed that of unskilled by the amount of the normal returns 
upon this cost; and, secondly, in the absence of effective com- 
petition, through the principle of monopoly, by limiting the 
number of competitors in skilled occupations, and so acting on 
the supply of skilled products. In either of these ways skill 
may raise value ; but, as skill, that is to say, in virtue of its 
own excellence, whether measured by the standard of utility 
or of artistic merit, it is powerless for this result. 

There is, indeed, a mode of speaking sanctioned by the lan- 
guage of some economists, and much in favor with those who 
seek to justify in all things existing industrial arrangements, 
which implies that skill, as such, is a source of value, and that 
high or low wages and prices are to be explained by reference 
simply to the results of the skill which services or commodities 
embody. For example, we constantly hear it said, in reply to 
complaints of wages being unduly low in certain industries, 
that this must be so, inasmuch as the services remunerated by 
these low wages are of little worth, while the higher wages ob- 
tained in others are explained by reference to the high worth 
of the services rendered by the workmen employed. Em- 
ployers, we are told, can not afford to pay any class of work- 
men more than their services are worth. Now, what is the 
standard of " worth" here adopted? There would seem to be 
but two standards possible; first that furnished by the ex- 



RELATION OF SKILL TO " COST." 79 

change itself: in other words, the "worth" of a service ma}' 
be measured by the money it commands. According to this 
conception of "worth," the statement that wages are low be- 
cause the services they remunerate are of little worth, and high 
because the worth of the services is high, merely means that 
wages are high or low because they are high or low, which does 
not much elucidate the problem ; while, in the assertion that 
employers can not pay their workmen more than their services 
are worth, the point at issue is formally begged, since — the 
standard of worth being the actual terms of the exchange — it 
amounts to saying that employers can not afford to pay their 
workmen more than they actually do pay them, which is just 
what the complainants deny. In truth, however, though this is 
the standard of worth upon which those who use the argument 
I am considering would, if pushed, probably rely, their language 
really suggests something more than this — the idea, namely, 
that industrial "worth" is something varying with the utility 
embodied in the services, or, what comes nearly to the same 
thing, with the skill which is productive of this utility. Some 
such sense as this must be assigned to their words if they are 
not to be taken as expressing barren truisms ; but in any such 
sense, the statements in question are wholly unfounded, ^o 
such connection between wages (it will be understood that 1 
speak now of comparative wages) and the utility or skillfulness 
of the services rendered exists as the language assumes, any 
more than a similar connection can be made out between these 
qualities and the prices of commodities. The true connection 
is not with either utility or skill, but, where competition is 
effective, with cost of production, and in the absence of effect- 
ive competition, with monopoly, more or less qualified, and 
acting through supply and demand. To return from this par- 
tial digression, we find labor, as an element of cost of produc- 
tion, measurable by reference to three of its incidents, and to 
three of its incidents only — 1st, the duration of the exertion, or 



80 NORMAL VALUE. 

the quantity of labor ; 2d, its severity or irksoraeness ; and 3d, 
the risk attending it. In whatever other qualities various sorts 
of labor may differ, unless so far as these are indications of 
onerous effort expended, they are no portion of the labor ele- 
ment of cost, and must be regarded as irrelevant to the ques- 
tion now in hand. 

The term " abstinence " is the name given to the sacrifice in- 
volved in the advance of capital. As to the nature of this 
sacrifice, it is mainly of a negative kind ; consisting chiefly in 
the deprivation or postponement of enjoyment, implied in the 
fact of parting with our wealth so far at least as concerns our 
present power of commanding it. The term, indeed, would im- 
ply that the sacrifice is wholly negative; but I am inclined to 
include in it a certain small positive element, namely, that low 
degree of risk which is never absent from the advance of capi- 
tal. That some degree of risk always accompanies the act in 
question is evident from the nature of the case, since it implies 
either the trusting of one's wealth to other persons, or, where 
it is employed by the owner himself in productive industry, 
the putting of it, with a view to future results, into forms not 
capable of being directly converted to his uses. It will be 
more convenient, I think, to consider this slight and inevitable 
risk, which is always present where abstinence is exercised for 
economic ends, as an incident of that sacrifice, than as a sub- 
stantive element of cost to be associated with " risk " as I have 
defined it in that character. I shall, therefore, so understand it, 
and shall accordingly define " abstinence " as the act of abstain- 
ing from the personal use of wealth with a view to employing 
it in productive industry, combined with that low degree of 
risk inevitably attaching to every such act. 

This being the nature of abstinence, the question will sug- 
gest itself how far it may be properly considered as an indus- 
trial sacrifice needing a stimulus to its exercise in the form of 
specific reward, and to be co-ordinated with labor in an aualy 



DOES ABSTINENCE NEED BEWABDf 81 

sis of the sacrifices of production. It must be admitted that 
its connection with production is not so intimate as that of 
labor, since capital, however it may augment the eflficiency of j 
industry, is not absolutely indispensable to it What we have ' 
to deal with, however, is not industry, as it may exist among 
savages or in very primitive communities, but industry as it ex- 
ists in civilized countries ; and to industry in this sense, to in- 
dustry as it must be carried on if the populations now inhabit- _, 
ing civilized countries are to continue to exist, capital is absolute- 
ly indispensable. But, if so, then abstinence, the act by which 
capital comes into existence, must be regarded as a necessary con- 
dition toward the efficacious prosecution of industrial pursuits. 
But is it properly a sacrifice? a sacrifice which needs, in 
order that it be undergone, the prospect of a specific reward? 
To put the question in another form, are profits to be placed 
on the same line with wages in an analysis of the economy of 
production ? As to the economic foundation of wages, the 
case is very clear. Wages are necessary, first, to support the 
laborer, and, secondly, in a free community, to induce him to 
work. Capital has no need to be fed and clothed, but, in order 
to its existence, there must be an adequate motive offered to 
the owners of wealth to induce them to employ it in this way. 
At present this inducement is found in profit; and the ques- 
tion to be considered is, whether, consistently with the main- 
tenance of capital, this inducement can be dispensed with. 
There are those who think it may, who hold that capital may 
be maintained without any deduction in favor of the capitalist 
from the value of the product which results from its use, and 
which they would assign in its entirety to those who take a 
personal, not to say a manual, part in the business of produc- 
tion.* Assuming that those who take this view understand 

* The language of some of the manifestoes of the International justifies this 
representation ; but I argue the question throughout as if it was onlyj)roposeito 
deprive the capitalist of his profit. 

6 



82 NORMAL VALUE. 

the process by wliich. capital exists and grows, we must sup- 
pose them to regard the act of abstaining from present enjoy- 
ment as in itself agreeable, and, coupled with the risk which 
always attends abstinence when practiced for industrial pur- 
poses, as constituting in some inscrutable way, irrespective of 
the gains which flow from it, its own reward ; so that, the pres- 
ent inducement being removed, the accumulation and increase 
of capital would go on with unabated force. It is scarcely 
necessary to remark on the perfect gratuitousness, not to say 
preposterousness, of such a notion. It is true, indeed, that ab- 
stinence may be for the rich, with whom its exercise rarely 
implies any sensible encroachment on customar}'^ comforts and 
luxuries, and still less on necessaries, but a trifling sacrifice; 
but even in their case, when practiced with a view to indus- 
trial investment, it means, as we know, risk also ; which is cer- 
tainly a sacrifice great enough not to be undergone without 
the clear prospect of adequate compensation. And even if we 
grant that a reservation of a portion of their wealth from im- 
mediate consumption would still be practiced by prudent and 
well-to-do people, even though the specific reward which now 
attends it were taken away (since there would still be the de- 
sire to provide for the future), it does not follow that what was 
thus reserved would necessarily go to assist productive indus- 
try ; nay, it is pretty certain that this would not be its destina- 
tion, since it might with' much less risk be converted into gold 
or silver, and hoarded. Even for those, therefore, with whom 
the sacrifice of abstinence would be slightest, a specific reward 
would be needed to secure its exercise. But with those who 
are not included, among the rich, with that great class of 
dealers and producers, from the ranks of unskilled labor up- 
ward, whose aggregate savings form the main support of the 
capital of civilized states, abstinence, far from being a slight, is 
always a serious, and often a very severe sacrifice. The mere 
act of resisting the temptation to present enjoyment, and of 



INCREASE OF CAPITAL. 83 

repressing the urgent requirements of the moment, often con- 
stitutes in itself a severe disciplirie, and demands for its accom- 
plishment no little strength of character; and to this has to 
be added the inevitable risk incident to industrial investment. 
Even as matters stand at present, the inducement is found for 
many to be all too weak ; but take away this inducement, ex- 
clude the prospect of future gain as the compensation for pres- 
ent trials, and what reason have we to suppose that such trials 
will be undergone ? 

I seem to be laboring to prove a truism; and, indeed, I am 
inclined to attribute the opinion I am combating rather to 
blank ignorance, or, at the least, profound mystification, on the 
part of those who hold it, respecting the nature and source of 
capital, than to deliberate acceptance of the premises on which 
alone it can logically rest. That the conversion of wealth to 
the purposes of productive industry, in other words, the crea- 
tion of capital,* involves self-denial, is what probably has nev- 
er crossed their imaginations : much more likely, if they have 
speculated on its origin at all, it would be connected in their 
minds with the issue of paper money and other operations of 
banking. But, however unsettled for them be the question as 
to the origin of capital, on one point they have no hesitation 
or doubt. Governments, it is a fixed article in their economic 
creed, have an unlimited command over capital, and may pos- 
sess themselves of it at all times, in any quantity required. 
Where such notions respecting capital prevail, it is natural 
enough that profits and interest should appear superfluous 
institutions. Unfortunately for the speculations in ques- 
tion, capital is not the creation of Banks, nor has Government 

* "Parsimony, and not industry, is the immediate canse of the increase of 
capital. Industry, indeed, provides the subject which parsimony accumulates. 
But whatever industry might acquire, if parsimony did not save and store up, 
the capital would never be the greater." — Wealth of Nations, McCdlloch'b 
edition, p. 149. 



84 NOEMAL VALUE. 

any means of obtaining it, except througli the crude expedient 
of taking it from those to whom it belongs. Unfortunately, 
again, the process by which capital is brought into existence, 
maintained, and increased, is, for the great mass of those who 
take part in the work, a really painful one. Under such cir- 
cumstances compensation and reward for those who perform 
this function is plainly an indispensable condition to the effect- 
ual prosecution of industry — a consideration which justifies us 
in co-ordinating abstinence with labor among the elements of 
cost of production, as we co-ordinate profits with wages in re- 
lation to the value of the product. 

Perhaps it may be well here to guard against a possible mis- 
apprehension of the doctrine just laid down. It has been as- 
sumed in the argument that capital is indispensable to the pros- 
ecution of systematic industry ; and the act, creative of capital, 
saving, parsimony, or abstinence, has been characterized as a 
sacrifice distinct from labor. It must not be supposed from 
this that there is any economic necessity, or any economic rea- 
son whatever, at least derivable from the arguments just used, 
that capitalists should form a distinct class from laborers. The 
distinctness of the sacrifices constitutes no ground for assign- 
ing them to different sets of persons. The same person may 
both labor and abstain, and, performing the double sacrifice, 
become entitled to the double reward. So far, indeed, am I 
from thinking that there is any thing in this combination of 
the parts of capitalist and laborer in one person which militates 
against the true economy of productive industry, that it is pre- 
cisely in this direction that, for my part, I am disposed to look 
for an escape from the growing embarrassments and difficulties 
that now beset the relations of capital and labor. But this is a 
point the consideration of which will more properly fall within 
another part of this work. 

Another possible ambiguity it may be well here to clear up. 
As was intimated just now, the sacrifice involved in a given 



INEQUALITIES OF SACRIFICE. 85 

act of abstinence is very different in the case of different per- 
sons. A rich man abstains from the consumption of his super- 
fluous wealth, and is scarcely conscious, perhaps quite uncon- 
scious, of having suffered any deprivation whatever : his sur- 
plus income goes to his capital account, which continues to 
grow, while his expenditure remains precisely as before. On 
the other hand, the same or a much smaller amount of wealth 
reserved from personal consumption by an artisan or a small 
tradesman will frequently demand the most rigorous self-de- 
nial. The same individual, too, feels very differently the 
pains of abstinence at different stages of his career — in the 
struggling outset and at the successful close. And it is similar 
with labor. The laborious effort fitted to produce a given re- 
sult does not represent the same sacrifice for different people : 
it is one thing for the strong, another for the weak; one fo-r 
the trained workman, another for the raw beginner. This 
being so, the question arises — How are such differences to be 
dealt with in computing the cost of production ? Are we to 
take account of what is personal and peculiar to the actual 
producers, and regard the cost of the commodity as higher or 
lower according as it has been produced by a weak or a strong 
workman, or by capital the result of painful or of painless sav- 
ing? The answer must be in the negative. The sacrifices to 
be taken account of, and which govern exchange value, are, 
not those undergone by A, B, or C, but the average sacrifices 
undergone by the class of laborers or capitalists to which the 
producers of the commodity belong. A few remarks will en- 
able us to make this clear. 

What at bottom maintains the connection between value 
and cost of production is, it must always be remembered, the 
power of choice residing in laborers and capitalists to decide 
between different occupations. Now what is it determines 
the choice? No doubt the prospects of the pursuit, the remu- 
neration being compared with the sacrifice. But what sacri- 



86 NORMAL VALUE. 

iice ? Plainly the sacrifice about to be undergone by the par- 
ticular workman or capitalist who has to make the choice. 
Each takes account of the incidents of the course proposed as 
it bears upon himself, and considers how it stands in the com- 
parison with others equally open to him. The conclusion he 
arrives at on this point determines his decision. Through a 
process of this kind every laborer and capitalist, either per- 
sonally himself, or vicariously through a parent or other ad- 
viser, passes. Carried on over any given field of industrial 
competition, it is evident the result of this proceeding must be, 
not to bring the remuneration of each of the individuals com- 
prised within it into conformity with the sacrifice which each 
undergoes, but to establish this conformity among the aggre- 
gates of those engaged in the several competing occupations; 
so that the total remuneration falling to each branch of indus- 
try shall bear the same proportion to the total sacrifices un- 
dergone in that branch as the total remuneration falling to any 
other within the same field bears to the sacrifices undergone 
in that other. The total remuneration falling to any branch 
of industry, however, consists of the total value of the commod- 
ities proceeding from it. This value, therefore, will bear the 
same proportion to the sacrifices undergone in producing it, as 
the value proceeding from any other industry within the same 
field of competition bears to the sacrifices of which it is the 
result. It follows that the relation which competition estab- 
lishes between cost and value is one, not between the value of 
particular commodities and the sacrifices of the individual or 
individuals who have produced each such commodity, but one 
between commodities taken as sorts and their cost of produc- 
tion. We can not, for example, assert that a particular pair 
of shoes will exchange against a particular coat in proportion 
to the sacrifices undergone respectively by the shoe-maker and 
the tailor in the actual case; but we may assert that, within a 
given field of competition, shoes, as one sort of commodity, will 



AVERAGE SACRIFICE. 87 

exchange against coats as another in this proportion. The 
costs, therefore, to -which the values of particular commodities 
correspond are not the particular sacrifices undergone in pro- 
ducing each commodity, but the average sacrifice undergone 
in producing each sort of commodity. We may, therefore, 
state broadly, that difierences in the sacrifices incident to pro- 
duction, whether of labor or of abstinence, which are due to 
peculiarities either in the physical, mental, or social circum- 
stances of individuals, are to be excluded from consideration 
in estimating cost of production. What we have to do with 
is, not individual sacrifice, but the average sacrifice of each in- 
dustrial class. 

This point being cleared up, we can have no difficulty in 
seeing how cost in its principal elements is to be computed. 
In the case of labor, the cost of producing a given commodity 
will be represented by the number of average laborers em- 
ployed in its production — regard at the same time being had 
to the severity of the work and the degree of risk it involves 
— multiplied by the duration of their labors. In that of ab- 
stinence, the principle is analogous : the sacrifice will be meas- 
ured by the quantity of wealth abstained from, taken in con- 
nection with the risk incurred, and multiplied by the duration 
of the abstinence. 

§ 7. We have now treated the subject of normal value, so 
far as it is regulated by the principle of cost of production. 
But, as I stated in the opening of this chapter, the phenomenon 
in question is by no means confined to cases in which the con- 
ditions necessary to the action of cost of production exist. The 
essence of normal value, as I then remarked, is a tendency in 
the exchanging proportions of commodities to gravitate toward 
a central point, and this tendency is observable in departments 
of exchange where effective competition among exchanging 
producers has no place. The most important example of this 



^ 



38 NORMAL VALUE. 

kind is furnished by international trade. As between the pro- 
ducers in different nations, whether laborers or capitalists, there 
is no effective competition, nothing, therefore, to secure that 
industrial rewards in different countries shall be brought into 
correspondence with industrial sacrifices ; nor, consequently, 
that international values shall correspond with cost of produc- 
tion. Nevertheless international values, or, let us say, the rel- 
ative prices of the products of different nations, do not vary at 
random irrespective of rule or measure, but exhibit precisely 
the same tendency to gravitate toward a central point as is 
manifested in those exchanges which are governed by cost of 
production. A less striking and hitherto, so far as I know, 
unnoticed, example of the same kind meets us in domestic 
trade. As I have pointed out, cost of production does not 
control value universally even within the limits of a single 
country : in respect to a considerable class of exchanges — all 
those, namely, which take place between what I have called 
non-competing industrial groups — its action fails. Yet not the 
less we observe here, as in international trade, the phenomenon 
of normal value. The exchanges between the non-competing 
groups — or, let us say, the relative prices of the products of 
such non-competing groups— though unamenable to the law 
of cost, are not without a controlling force which restrains 
their fluctuations and guides them toward a normal result. 
This is the phenomenon with which we have now to deal; 
and the question to be considered is the nature of the force 
or forces which, in such cases, come into play. 

Fortunately the problem has already, in principle at least, 
been solved for us by Mr. Mill. Mr. Mill has not, indeed, car- 
ried his solution beyond the case of international values; but 
his doctrine is manifestly applicable to all cases in which 
groups of producers, excluded from reciprocal industrial com- 
petition, exchange their products. Such cases, as I have 
shown, occur in domestic trade in the exchanges between 



"THE EQUATION OF INTERNATIONAL DEMAND." 89 

those non-competing industrial groups of which I have spoken. 
The principle, therefore, which operates in international trade 
must operate here; and little more needs to be done, to com- 
plete the theory of this part of our subject, than to point the 
application of Mr. Mill's doctrine to this strictly parallel case. 

That doctrine may be thus briefly stated : International val- 
ues are governed by the reciprocal demand of commercial 
countries for each other's productions, or, more precisely, by 
the demand of each country for the productions of all other 
countries as against the demand of all other countries for what 
it produces; the result of this play of forces being that, on the 
whole, the exports of each country discharge its liabilities (of 
which the principal are on account of its imports) toward all 
other countries.* Whatever be the exchanging proportions — 
or, let us say, whatever be the state of relative prices — in dif- 
ferent countries which is requisite to secure this result, those 
exchanging proportions, that state of relative prices, will be- 
come normal — will furnish the central point toward which the 
fluctuations of international prices will gravitate, the rule to 
which in the long run they will conform. Such is the law 
governing international values, called by Mr. Mill " the Equa- 
tion of International Demand." What we have now to con- 
sider is the mode in which this principle operates in the case 
of the non-competing groups of domestic trade. 

And first, in what sense are we to understand "reciprocal 
demand" as applied to non-competing industrial groups? 
Manifestly, in conformity with the analogy of the international 
case, as the demand of each group for the products of all oth- 
er groups compared with the demand of all other groups for 
what this group produces. How, again, are we to measure 



* As the doctrine is ordinarily stated, the exports of each country are said to 
balance its imports, but, as I shall hereafter show, this mode of stating it is not 
accurate. See ;)0s#, part iii. , chap. iii. 



90 NORMAL VALUE. 

such demand? Again I say, in conformity with the same 
analogy, by the quantity of the products of each group avail- 
able for the purchase of the products of other groups; while 
the products of other groups available for the purchase of the 
products of any given group will measure their demand for 
the products of that group. Lastly, how are we to understand 
the "Equation of Demand," as applied to non - competing 
groups? Still following the international analogy, I reply, as 
such a state of exchanging proportions among the products of 
the various groups — or, let us say, as such a state of relative 
prices among such products as shall enable that portion of the 
products of each group which is applied to the purchase of the 
products of all other groups to discharge its liabilities toward 
those other groups. The two cases thus run strictly on all- 
fours, and the play of the forces in action is in all respects 
the same. As in international trade an increased demand for 
the products of other countries will, other things being equal, 
affect international values — or, let us say, affect the relative 
prices of the products of different countries — unfavorably for 
the country whose demand is increased; and as, again, the 
converse of this eondition, an increased demand by other coun- 
tries for the products of a given country, will operate in the 
contrary direction ; so it will be in the exchanges which take 
place between non-competing domestic groups. Whatever in- 
creases the demand of a given group for the products of out- 
side, that is to say non-competing, industries, or (what comes 
to the same thing) whatever increases the supply of its prod- 
ucts available for the purchase of the products of such indus- 
tries, will, other things being the same, depress the prices of 
its products in relation to the prices of the products of the in- 
dustries against which they are exchanged, and vice versa; 
while whatever increases the demand of the outside industries 
for the products of a given group will have the contrary ef- 
fect, and will raise the level of its prices in relation to those 



NATURE OF RECIPROCAL DEMAND. 91 

of the non - competing groups -with which it trades, and vice 
versa. The relative position, commercially considered, of each 
group m^y thus be affected either by an increase or diminu- 
tion of its own products not consumed within the group, or by 
an increase or diminution of the products of other groups, so 
far as those products are disposable for the purchase of the 
products of the group in question. Such is the nature of " re- 
ciprocal demand," and of its mode of action as between the 
non-competing groups of domestic industry. As the reader 
will observe, it is simply " supply and demand " taken twice 
over, first in the sale and then in the purchase, or, rather, we 
may describe it as Supply and Demand contemplated at once 
from both sides of a completed exchange. 

But it may not be at once apparent how a principle of this 
character is fitted to accomplish the result ascribed to it — that 
of determining normal^ as distinguished from temporary or 
market, value. As I have remarked. Reciprocal Demand is 
merely duplicate Supply and Demand regarded in its full sig- 
nificance; but Supply and Demand, as we are most familiar 
with their action, are, in their relation to prices, merely proxi- 
mate agencies, governing indeed the fluctuations of the mar- 
ket, but themselves controlled by forces lying deeper in the 
economy of production. How then does it happen that, in 
the cases under consideration, those agencies are capable of 
doing more than this — capable of determining, not simply the 
fluctuations of the market, but the rule to which, in the long 
run, the fluctuations of the market conform ? 

The answer to this question is to be found in the circum- 
stances which give stability to Reciprocal Demand in the class 
of exchanges we are now considering. Reciprocal Demand, 
or, if the reader prefers it. Supply and Demand, in relation to 
a particular commodity, or even to a considerable number of 
commodities, may, as we know, vary in almost any conceivable 
degree, and with great rapidity. But when we consider them 



92 NORMAL VALUE. 

as aflPecting aggregates of transactions carried on between limit-, 
ed bodies of producers — for example, between independent na- 
tions, or between non-competing industrial groups — the case is 
very different ; and the limits within which variation is possi- 
ble are in fact pretty strictly determined; for in this case the 
measure of the aggregate demand of each trading body will be 
the total of its productions, and the measure of its demand for 
the productions of the bodies with which it trades will be the 
proportion of its total production which it desires to apply to 
the purchase of the productions of those bodies. Now, in the 
absence of any great changes in the conditions of productive 
industry, and of legislation specially contrived for this purpose, 
neither the aggregate production of a community nor the pro- 
portion of its means employed in interchanges with other com- 
munities can easily undergo on a sudden' serious variation. 
The total production will depend on the nature and extent of 
its resources ; and the proportion employed in external trading 
on the comparative character of those resources as they stand 
related to those of the communities with which it trades. 
These, indeed, are not circumstances which can be regarded as 
absolutely fixed. On the contrary, the conditions of produc- 
tive industry over the best portion of the industrial world are 
and have for long been pretty steadily progressive. But the, 
progress, though steady, has in general been slow. Sudden 
changes, at least on a scale large enough to effect great aggre- 
gates of transactions, but rarely occur ; and further, what is 
pertinent to our purpose, where important improvements in 
productive industry do happen, they are seldom confined to a 
single community, but, after an interval more or less brief, are 
in general shared by other communities, so that the relative 
positions of the various trading bodies are in the end but 
slightly affected. It follows that the demand of such bodies, 
however it may vary in respect to particular commodities, 
can not easily as an aggregate undergo any great or sudden 



NATURE OF RECIPROCAL DEMAND. 93 

change; while their reciprocal demand for each other's pro- 
ductions, which expresses their relative industrial condition, 
will be still less liable to serious or abrupt disturbance. Here, 
then, we find the conditions fitted to produce that stability of 
exchanging relations which is implied in the term "normal 
value." While the prices of particular commodities may fluc- 
tuate indefinitely in international as in other trade, the same 
possibility does not exist for the prices of aggregates of com- 
modities exchanged by definite groups of producers, such as 
.independent nations, or the non-competing sections in domestic 
industry. The limits to such fluctuations are set in the limit- 
ed purchasing power, incident to the limited productive power, 
at any given time possessed by such trading groups. It is in 
this way that a normal relation arises in the terms of the trans- 
actions carried on, and that a central point is furnished toward 
which the fluctuations of the market gravitate, performing in 
such trade the same function discharged under a regime of com- 
petition by the principle of cost. 

Cost of Production and Eeciprocal Demand in the sense ex- 
plained, it thus appears, perform in certain circumstances sim- 
ilar economic oflGices. It remains now to point out an impor- 
tant difference in their modes of action and in the character 
of the results which flow from them. They each, as I have 
said, furnish a centre about which market values gravitate; 
but there is this difference between the two cases: The centre 
furnished by Cost of Production stands related to the fluctua- 
tions of the individual commodity ; that supplied by Eecipro- 
cal Demand to the average fluctuations of considerable aggre- 
gates of commodities. A reduction in the cost of producing 
a hat will lower its price, but will have no tendency to affect 
the price of any other thing. But an alteration in the recip- 
rocal demand of two trading nations will act upon the price, 
not of any commodity in particular, but of every commodity 
which enters into the trade. What such an alteration necessi- 



M NORMAL VALUE. 

tates is a change in the average terms on which the trade is 
carried on ; but it decides nothing as to the details by which 
the required average shall be attained and maintained. This 
is determined, not by international demand, but by those cir- 
cumstances in the internal industries of each country which 
regulate in each the relative prices of its products. And sim- 
ilarly in the interchanges of non-competing domestic groups, 
what the reciprocal demand of the groups determines is the 
average relative level of prices within each group ; the distri- 
bution of price among the individual products being regulated 
by the cause which governs value within it, namely cost of 
production. 

The net result would seem to be this : Eeciprocal Interna- 
tional Demand determines the average level of prices through- 
out the entire trade of each commercial country in relation to 
that prevailing in other countries in commercial connection 
with it. Eeciprocal Domestic Demand determines certain 
minor relative averages extending over classes of articles, the 
products of non-competing industrial groups; while Cost of 
Production acts upon particular commodities, and, in each case, 
within the range of industrial competition, determines their rel- 
ative prices. The actual price, therefore, of any given commod- 
ity will, it is evident, be the composite ;'esult of the combined 
action of these several agencies. 

Another distinction needs to be noticed between Eeciprocal 
Demand and Cost of Production in their operation upon nor- 
mal value. The former is, on the whole, far more steady and 
equable in its action than the latter. The reason is plain. 
Changes in cost of production depend mainly on the progress 
of the industrial arts, and this has for some time been and, we 
may perhaps assume, is likely for a long time to continue to 
be, remarkably rapid. Thus we find in the course of the pres- 
ent century an immense reduction in the costs of producing a 
large number of articles of general consumption, accompanied 



NATURE OF RECIPROCAL DEMAND. 95 

by a corresponding reduction in their value. On the other 
hand, changes in reciprocal demand are chiefly due to moral, 
social, and political causes, operating on a scale large enough 
to affect the relative positions of considerable bodies of men. 
Such changes are necessarily of slow accomplishment; and 
consequently the variations in value which result from them 
are rarely of a striking character, and in general proceed so 
slowly that they can seldom be perceived unless the compari- 
son be made between prices taken at periods separated by con- 
siderable intervals of time. Still such changes do occur, and 
international values, as well as the corresponding class of values 
in domestic trade, respond to them. For example, I think we 
may assume that the adoption of free trade by England has 
improved her international position in the trade of the world. 
I do not refer to the extension of her trade, which, as all the 
world knows, has been enormous, but to the terms on which 
it is carried on. A given exertion of English industry will 
now command in the exchange with foreign countries the 
product of a larger exertion of foreign industry than former- 
ly. In the domestic sphere, probably the most potent agency 
affecting reciprocal demand is the progress of popular educa- 
tion. Supposing, for example, that the system of primary ed- 
ucation now being established in this country proves as sue* 
cessful as the friends of education desire; and supposing again, 
and mdte particularly, that effective provision is made in it for 
facilitating the ascent of promising boys from the lower to the 
higher educational levels, I think we may with some confi- 
dence predict that the movement will issue in a considerable 
change in the relative prices of certain classes of commodities 
in, this country ; nor can we have much difficulty in perceiving 
what will be the general direction of the change. Plainly the 
effect will be to augment the number of skilled workmen in 
relation to the unskilled, and of highly skilled workmen in 
relation to workmen possessing .skill of the more common 



96 NORMAL VALUE. 

sorts. The social wall of partition which now divides the 
non-competing groups will to a large extent be broken down, 
and many of those occupying the lower levels will take ad- 
vantage of the breach to press into those above them. The 
result will be a change in the reciprocal demand of the several 
groups. The demand of the groups representing the higher 
sorts of industrial skill will increase relatively to that of the 
groups representing the lower; or, to put the same point in a 
different form, the supply of the products of the former groups 
will increase relatively to that of the products of the latter. 
The inevitable consequence must be a change in relative prices 
unfavorable to the higher, and in a corresponding degree fa- 
vorable to the lower sorts, of skilled industry. In a word, the 
qualified monopolies resting upon social conditions which now 
exist will be still further qualified : the range of competition 
will be enlarged; and, just in proportion as these results are 
attained, relative prices, and with them relative wages, will be 
made to approximate, more closely than at present, to the rule 
of cost. We may illustrate the case by the state of things in 
new colonies. There, owing to causes precisely similar to those 
which the educational movement is tending to develop here — 
owing, that is to say, to the great equality of conditions pre- 
vailing among the industrial population — the coarser kinds of 
labor and the lower sorts of skill are not merely positively, 
but comparatively, in relation to the finer and higher sorts, far 
more highly remunerated than they are at present with us. 
The explanation is that which has just been given: competi- 
tion has there a wider range; and wherever this is so, prices 
and remuneration will represent more truly the actual sacri- 
fices undergone by producers. 



CHAPTER IV. 

MARKET VALUE. 

% 1. The nature of Normal Yalue has been discussed in the 
preceding chapter. As was there pointed out, the propor- 
tion which it represents is not necessarily that which is real- 
ized in any actual sale, but that to which all sales, in the case 
of commodities which possess normal value, tend to conform. 
The problem which we have now to consider is that presented 
by actual sales. What are the conditions which determine 
the proportions in which commodities exchange for each other 
on any given occasion in any given market? More briefly, 
what is the explanation of market prices? This question, 
after having been discussed by economists from Turgot and 
Adam Smith to Mill, was at length supposed to have received 
its definitive solution in the chapter on " Demand and Supply " 
in the Principles of Political Economy by the latter authority. 
Tiaat solution, however, has lately been challenged by Mr. 
Thornton, I must own it seems to me, so far as the negative 
portion of his criticism is concerned, with success. As re- 
gards, however, the explanation he has offered in lieu of that 
which he has displaced, I fail to discover in it what can be 
considered a satisfactory account of the phenomenon under 
discussion. According to Mr. Thornton, market prices de- 
pend upon "competition;" while of competition he tells us 
that, " if it can properly be said to depend on any thing, it de- 
pends partly on individual necessity, partly on individual dis- 
cretion ; and as for the first of these there is proverbially, and 
for the other manifestly, no law, so likewise is there no law of 

^1 



98 MARKET VALUE. 

competition. Neither, if there be no law of competition, and 
if competition be, as it has been shown to be, the determining 
cause of price, can there be any law of price." As I do not 
admit that there is "no law" for "individual necessity" any 
more than I admit that there is " no law " for " individual dis- 
cretion" — understanding "law" in the scientific sense of the 
word, which alone is that with which Political Economy is 
concerned — I should be unable to accept Mr. Thornton's con- 
clusion, even though his analysis of " competition " were much 
more satisfactory than it seems to me to be. For my part, I 
believe that, whether we are able to discover it or not, there 
|is a law of market price, as there is a law of normal price, as 
j there is a law of wages, of profits, of rent, as there are laws of 
ithe winds and tides and seasons, and of the phenomena of 
; external nature — a law in the only sense in which law can be 
predicated of natural objects ; namely, as consisting in the con- 
stancy of the_relation between facts and the conditions which 
produce them. \ 

§ 2. Market price — I speak now exclusively of price in 
wholesale markets — has from the first been seen to be con- 
nected with the agencies of Supply and Demand ; it has al- 
ways been very obvious that an increase of supply tends to 
lower price, and an increase of demand to raise it; but be- 
yond this rather crude generalization economic speculation 
did not for some time pass. To furnish what deserves to be 
called a law of the phenomenon, it is evidently necessary to 
determine with some degree of precision the elements that en- 
ter into Supply and Demand when acting upon the prices of 
the market, and the mode in which these two agencies co-op- 
erate to produce the actual result. In other words, Demand 
and Supply must be defined, and the manner of their influence 
ascertained. The following was Adam Smith's contribution 
toward the solution of this problem : " The market price of 



ADAM SMITH'S DOCTRINE. 99 

every particular commodity is regulated by the proportion 
between the quantity which is actually brought to market and 
the demand of those who are willing to pay the natural price 
of the commodity, or the whole value of the rent, labor, and 
profit which must be paid in order to bring it thither."* Ac- 
cording to this, "Supply" is to be understood as the quantity 
of a commodity actually brought to market, and " Demand " 
as the desire to purchase felt by those who are willing to pay 
the natural, or (as I have phrased it) the normal, price; the 
terms of the exchange in the particular market being regu- 
lated by the "proportion" between these two things. Every 
economist knows the criticism passed by Mr. Mill on this 
doctrine. 

" These phrases," he says, " foil to satisfy any one who re- 
quires clear ideas and a perfectly precise expression of them. 
Some confusion must always attach to a phrase so inappropri- 
ate as that of a ratio between things not of the same denomina- 
tion. What ratio can there be between a quantity and a desire, 
or even a desire combined with a power ?"f This criticism 
has been generally acquiesced in ; but I have endeavored in 
a former chapter:}: to show that it is not conclusive ; that in 
truth Supply (in the sense in which it affects price) is not sim- 
ply a quantity, but a quantity accompanied by a mental feel- 
ing, as Demand is not simply a mental feeling, but a mental 
feeling accompanied by a quantity, the quantity, namely, of 
purchasing power offered by the demander ; in short, that 
Supply and Demand are things essentially of the same order, 
of the same denomination, and such therefore as may properly 
be regarded as bearing a ratio to each other. But though not 
open, as it seems to me, to Mr, Mill's criticism, Adam Smith's 



* " Wealth of Nations," book i., chap. vii. 

■I- "Principles of Political Economy," vol. i,, p. 549. 

X See ante, pp. 25, 26. 

L.ofC. 



100 MARKET VALUE. 

doctrine can less easily be defended against objections of an- 
other kind. It is not quite clear from the passage in what 
sense he uses the word " market," whether as a sort of abstract 
term to comprise all places where things are bought and sold, 
or as signifying some one particular or given place of this 
kind. I am, for my part, disposed to understand him in the 
latter sense; indeed the former would hardly have satisfied 
the requirements of the problem he had to consider; and tak- 
ing the word in this sense, his statement is that the price of a 
commodity in any particular market is regulated by the " pro- 
portion " which the quantity of it in that market bears to the 
demand for it (in the sense defined) there existing. Now it 
will be seen on reflection that this statement is, as a matter of 
fact, untrue. The price of corn, for example, in a given mar- 
ket does not depend (other things there being supposed con- 
stant) on the quantity of corn brought to that market, under- 
standing by this all that the dealers are then and there pre- 
pared to sell. For example, it often happens that intelligence 
received during the holding of a market respecting supply in 
some remote quarter of the world affects price, though no 
change has been made in the quantity of the commodity im- 
mediately available in the particular market. And occasions 
have occurred when a sudden change of weather in some criti- 
cal period of the year, from the effect it is supposed likely to 
produce on the harvest, has led to a similar result. It is evi- 
. dent, therefore, that the supply which constitutes one factor in 
the determination of market price is not simply the quantity 
of a commodity present in a particular market. A similar 
criticism may be passed upon Adam Smith's definition of " de- 
mand." It is not true that the demand which constitutes the 
other factor in the case is always, or necessarily, "the demand 
for the commodity at its natural price." Suppose the selling 
price at a particular time and place to be above the natural 
price, so much of the demand as refuses to rise beyond the 



MR. MILVS DOCTRINE. 101 

natural price ceases to affect the result ; while, on the other 
hand, on the supposition that the selling price were lower 
than the natural price, the result would be affected by a de- 
mand at a lower than the natural price, namely, by any de- 
mand which is content to give the selling price, or any price 
above that. Lastly, even though the definitions of " supply " 
and "demand" given by Adam Smith could be shown to 
satisfy the conditions of the case, which we have seen they do 
not, the statement that market price is regulated by the "pro- 
portion" between them, while we are left uninformed as to the 
nature of this proportion, can not but be regarded as too 
vague to fulfill the requirements of a scientific theory. 

§ 3. I turn now to Mr. Mill's doctrine of Market Price. As 
I have just said, that doctrine has been challenged by Mr. 
Thornton, and, in my opinion, successfully; but I prefer to 
state my objection to it in my own way. According to Mr. 
Mill, demand is measured, not by the purchasing power offered 
in support of the desire to purchase, but by the quantity of the 
commodity demanded at the selling price in a given market ; 
and similarly the measure of supply is the quantity offered at 
the selling price. Understanding Demand and Supply in these 
senses, he laid it down that the actual price ruling in any given 
market is the price which equalizes demand and supply. As 
a matter of fact, however, it may be pointed out, and has been 
pointed out by Mr. Thornton, that the demand in the market 
at the selling price may be greater than the supply forth-com- 
ing in that market can satisfy ; as, on the other hand, the sup- 
ply at the selling price may be in excess of what the actual de- 
mand at that price will take off. In either of these cases (and 
one or other of them is the case of almost all markets) Supply 
and Demand are not equalized. In all such instances, there- 
fore, Mr. Mill's theory fails to explain the phenomenon of mar- 
ket price. To this objection Mr. Mill has replied by saying 



102 MABKET VALUE. 

that "reserving a price is to all intents and purposes withdraw- 
ing supply " — in other words, so much of the supply as is not 
sold, either because the owner is dissatisfied with the current 
price, or can not find sufficient purchasers at that price, is not 
to be counted as supply. 

" When no more than forty shillings a head can be obtained for sheep, 
all sheep whose owners are determined not to sell them for less than fifty 
shillings are out of the market, and form no part at all of the supply which 
is now determining price. They may have been offered for sale, but they 
have been withdrawn. .... In the mean while, the price has been de- 
termined without any reference to his [the owner's] withheld stock, and 
determined in such a manner that the demand at that price shall (if pos- 
sible) be equal to the supply which the dealers are willing to part with at 
that price. The economists who say that market price is determined by 
demand and supply do not mean that it is determined by the whole sup- 
ply which would be forthcoming at an unattainable price, any more than 
by the whole demand that would be called forth if the article could be 
had for an old song. They mean that, whatever the price turns out to 
be, it will be such that the demand at that price, and the supply at that 
price, will be equal to one another."* 

It is evident that the same reasons which require that Sup- 
ply should be limited to so much of the commodity as is dis- 
posed of in actual sale, would make it necessary that Demand 
should be limited to so much of the desire to purchase as finds 
satisfaction in actual purchase ; since otherwise there would be 
no security that it might not exceed Supply. So explained, it 
can not be denied that Mr. Mill's position is logically impreg- 
nable. Unfortunately, however, the same limitations which 
render it logically impregnable make it also not worth defend- 
ing; for, understood in the sense in which the terms have now 
been defined, the doctrine of the equality of Demand and Sup- 
ply as the condition of market price becomes a mere identical 



* Fortnightly Review, May, 1869, Mr. Mill's review of Mr. Thornton's " La- 
bor," pp, 512, 513. 



MR. MILL'S DOCTRINE. 103 

proposition. The quantity demanded and the quantity supplied 
at the market price are necessarily equal when the quantity 
demanded is only another name for the quantity bought, and 
the quantity supplied another name for the quantity sold. 
They are necessarily equal, since they are one and the same 
quantity. Mr. Mill's doctrine, then, limited as he has limited 
it, is undeniably true; but the question remains, what light 
does it throw upon the phenomenon it undertakes to explain ? 
— how far can it be considered as stating the law of market 
prices? We desire to know the circumstances which deter- 
mine price ; and we are told that the selling price is always 
such that the quantity of a commodity purchased in a given 
market is equal to the quantity sold in that market. The 
statement is incontrovertible, but I fail to perceive how it helps 
us to understand the facts. Further, the limitation by which 
the doctrine is rescued is itself open to serious objection. In 
the passage I have quoted it is stated that the portion of the 
supply which is reserved for future sale " forms no part of the 
supply which is now determining price." Here I join issue on 
a question of fact. I contend that, in coming to a decision on 
the actual price, the dealers in a market take account, not 
merely of the quantity of the commodity that is there actually 
sold, but of all the commodity in the market; and not merely 
of this, but of the supply obtainable from other quarters. On 
this point I can only appeal to facts. It appears to me cer- 
tain that the supply which determines price is quite as much 
the supply that is not sold as the supply that is sold ; and the 
demand quite as much the demand that is not satisfied as the_ 
demand that is satisfied. In other words, supply and demand j 
outside the market are among the conditions which determine, 
price within the market. But if so, Mr. Mill's doctrine not 
merely fails to solve the problem of market price, but pointed- 
ly excludes from consideration conditions which are essential 
to the solution of that problem. Under these circumstances I 



104 MARKET VALUE. 

shall perhaps be pardoned for attempting some more precise 
statement of the facts governing the phenomenon than is fur- 
nished by the current doctrine. 

§ 4. In order to bring the terms of our theory into conform- 
ity with the facts of the case, it appears to me that we must 
give to the words "supply" and "demand" a much more ex- 
tended signification than is given to them in the formulas ei- 
ther of Adam Smith or of Mill. fBy "supply," as affecting 
market price, I would understand not merely the quantity of 
a commodity sold, oflfered for sale, or present in a given mar- 
ket, but the quantity intended for sale wherever it exists which 
lihe dealers in the particular market know or believe to be 
Available, to meet, within certain limits of time, the demand 
which falls within the range of their dealing ; and by " de- 
mand," a strictly analogous conception, namely, the desire, so 
far as accompanied by purchasing power anywhere existing 
I for the commodity, which, in the opinion of the dealers in the 
I market, admits of being satisfied within certain limits of time 
I by the attainable supply; the "certain limits of time" in each 
I case being the period intervening between the time of sale and 
I that at which fresh supplies can be brought forward from the 
ordinary sources of production. I am far from thinking that 
these definitions are free from flaw, or that cases of supply and 
demand affecting market price may not be found which will 
not easily fall within their scope, but I believe they comprise 
the most important conditions determining the result, and I 
am sure that no less extensive definitions would be even ap- 
proximately adequate. 

Understanding, then. Demand and Supply in the senses de- 
fined, as the factors which conjointly produce the phenomenon, 
we have next to consider the manner of their operation. This, 
it is evident, can only be indirect, since price expresses a con- 
tract between human beings, whose wills, therefore, must form 



CONSTAXCT OF RELATION. 105 

the primary link in the causal chain. As we have seen, the 
notion of Adam Smith was, and this is probably still the pre- 
vailing idea, that the result is regulated by the " proportion " 
between demand and supply — this proportion, as we must sup- 
pose, producing its effect through the minds of those who take 
part in the exchange. I have already stated my reasons for 
regarding Demand and Supply as ideas of the same order, be- 
tween which, therefore, a proportion may properly be assumed 
to exist. But to render Adam Smith's doctrine effectual for 
its purpose, we must not only suppose a proportion existing 
between demand and supply, but also that between this pro- 
portion and the market price there is some constancy of rela- 
tion, such that, knowing the relation in any given case, we 
should be able to predict what the price would be in the event 
of a change in the conditions of the market. Now this is what 
I believe it would be quite impossible to establish. At all 
events, it may be shown that the formula, if it were possible to 
evolve one, would need to be different for every different kind 
of commodity, and to be altered with every change in either 
the amount or the distribution of purchasing power in a com- 
munity. Thus a change in the supply of a necessary of life 
is, as has often been pointed out, capable of producing effects 
on price much greater than in proportion to the extent of the 
change. A reduction of one-fourth, or one-third, for instance, 
in the food of a people might easily issue in a twofold or three- 
fold advance of price ; while an equal change in the supply of 
a comfort or convenience, which may easily be dispensed with, 
but may also by increased cheapness rapidly attract a larger 
demand, is generally attended with effects on price much less 
marked. And, as I have said, these results would be further 
varied by every change in the amount or the distribution of 
the available purchasing power. For these reasons it appears 
to me that the idea of a proportion, as furnishing a clue to the 
connection of demand and supply with market price, must be 



106 ' MARKET VALUE. 

abandoned, if on no other ground, from the impossibility of de- 
termining it ; and that, instead of a quantitative formula, we 
must content ourselves with an approximately accurate de- 
scription. 

Let us consider the circumstances under which the selling 
price comes to be decided in any wholesale market. We will 
suppose the commodity dealt in to be corn. An intending 
purchaser enters the market, having previously obtained by 
such means as were open to him information respecting the 
stock of corn in the country, or likely within a certain period 
to be forth-coming from abroad ; and he there finds certain 
quantities offered for sale. He has also made himself acquaint- 
ed with the demand for ordinary consumption, so far as it 
seems likely to come within the range of his dealings. On 
these data he founds an opinion as to what the price of corn 
ought to be. The opinion thus formed is not absolutely defin- 
itive. He allows it to be modified more or less by the opinions 
which he finds prevailing in the market. Under the influence 
of all these considerations he comes to a conclusion as to the 
price, which — while anxious to procure his commodity as 
cheaply as he can — he will, rather than go without, be pre- 
pared to pay. The seller of corn goes through a similar proc- 
ess, with of course the converse object, availing himself accord- 
ing to his intelligence of similar means of information. Sup- 
posing the conclusion he comes to be that the demand, in the 
' sense I have defined it, is capable of taking off the supply, un- 
derstood also in the sense I have defined it, at a higher price 
than that which formed the conclusion of the buyer's calcula- 
tions, under these circumstances there would be no transaction 
between them ; and if their opinions represented respectively 
the opinions of all the buyers and all the sellers in the market, 
no transaction would in that market take place. This of 
course is what rarely or never happens. Buyers and sellers in 
the same town or district, having mostly the same opportu- 



PROPER MARKET PRICE. 107 

nities of information, will not in general differ very widely in 
their estimates of demand and supply; and where they differ 
but slightly, their opinions coming in so limited an area within 
the sphere of each other's attraction, are apt to issue in agree- 
ment; the exact price arrived at always depending in some 
degree on the firmness and shrewdness of individual men. 
This is what is called the 'higgling of the market' — the proc- 
ess on which, within the narrow limits of variation set by the 
deliberate opinions of experts, the final result depends. 

The influence of Demand and Supply on the price-current 
in a given market is thus exercised through the opinions of 
the dealers in that market; and the problem to which the 
dealers in forming their opinions address themselves, is to as- 
certain, having regard to the known conditions of the case, 
what the price of the commodity ought to be. Let us now 
endeavor to determine, with as much precision as may be, the 
nature of the problem thus presented to buyers and sellers in 
a wholesale market. I grant it is very probable that most of 
those who speak freely of the price which happens to obtain 
in a market as " too high " or " too low," or " such as it ought 
to be," might find it difficult, if challenged, to explain the 
meaning of their words: nevertheless, I believe that these ex- 
pressions do at least point to a meaning, perhaps a latent one, 
in the minds of those who use them. However this may be, 
it can at all events be shown that there is in every market a 
price at which it is desirable that the commodity, whatever it 
may be, should sell at that time and place — desirable ultimate- 
ly in the interest of consumers, but in a certain sense desirable 
also in the interest of dealers, taking buyers and sellers to- 
gether, and which the combijied operations of both, so far as 
they are well informed respecting the conditions of supply and 
demand, really tend to establish. To satisfy ourselves of this, 
it is only necessary to consider that, in all states of supply and 
demand, there is always a certain price beyond which, if the 



108 MARKET VALUE. 

markets rise, consumption is unnecessarily checked, and the 
stocks in the country pass off more slowly than is needful. 
In time the error is discovered, and a competition sets in 
among holders of the commodity, which issues in a fall of 
price, tending to stimulate consumption as much as it had pre- 
viously been unduly checked. On the other hand, supposing 
the market price to be set too low, stocks become exhausted 
too soon, and the undue fall will need to be compensated by 
a corresponding advance at a later period. Such oscillations 
are at variance with the interest of the consumer; and the 
price, therefore, which renders them unnecessary, which is just 
sufficient, and no more than sufficient, to carry the existing 
supply over, with such a surplus as circumstances may ren- 
der advisable,* to meet the new supplies forth-coming, may, 
I think, be conveniently designated as the "proper price" of 
the market.f It is this price which, it seems to me, the deal- 



* It is necessary to introduce this qualifying clause, since it is not always for 
the interest of the consumer that consumption should proceed at such a pace as 
to exhaust existing stocks exactly as the new supplies are coming into the market. 
It would be so if he could be sure that the new supplies would sell at a price not 
higher than that which had been previously current ; but in the case of raw prod- 
ucts, and more especially in that of food (for reasons which will presently be 
pointed out), he can not be sure of this. It is, therefore, in the interest of con- 
sumers, that is to say of the community, that, in the uncertainty as to what may 
be the degree of abundance or scarcity of forthcoming supplies, a certain surplus 
should be kept in hand, which should be greater or less according to the prospects 
of the incoming season, with a view to supplement the possible deficiencies of fu- 
ture supplies ; and the market price called for by the interest of consumers would 
manifestly be that which would be sufficient, not merely to carry existing stocks 
over to the arrival of new supplies, but to maintain also such a surplus. (See 
Tooke's "History of Prices," vol. v., part i., § 22, where the reader will find the 
Bubject discussed with Mr. Tooke's usual discrimination.) 

t According to Mr. Mill, the actual market price is the price which equalizes 
supply and demand in a given market : as I view the case, the "proper market 
price " is the price which equalizes supply and demand, not as existing in the 
particular market, but in the larger sense which I have assigned to the terms. 



FUNCTION OF SPECULATORS. 109 

ers in tlie market have dimly in view when by implication 
they refer to a standard by which they pronounce the actual 
price to be " too high," or " too low," or " what it ought to be." 
I would define it as the price which sufiices to adjust in the 
most advantageous way the existing supply to the existing 
demand pending the coming forward of fresh supplies from 

the sources of production. .^ 

I have now, I hope, made it plain that in a given state of 
demand and supply there is a certain market price which is 
identified with the consumer's interest; and, in doing so, I 
have observed incidentally that the price satisfies no less the 
true interest of dealers. It remains to show somewhat more 
explicitly how it comes within the range of the latter's specu- 
lations, so as to become the point toward which the operations 
converge; since it is only in proportion as this is the case that ) 
the action of the wholesale market has any tendency to evetve-' 
what I have called the "proper pric e." Jhe buyer, as we 
know, seeks to buy as cheaply as he can ; the seller to sell as 
dearly as he can ; but, with all this, it is the interest of both 
to know the price beyond which, in one direction the buyer, 
in the other the seller, can not pass without loss ; and this is 
precisely the price which stands identified with the consumer's 
interest. For, as we have seen, if the price rises beyond this 
point, consumption is checked, stocks accumulate, and a fall 
of price is necessitated, to the loss of all dealers who have pur- 
chased above the depressed rate; while, on the other hand, if the 
price falls below it, the result is an advance at a future time, 
to the loss of all who had sold ivhile the loiver price jJrevailed. It 
IS evident, therefore, that dealers are interested in knowing 
the "proper price" of the market, and further, it is evident 
tnat It is toward this point that the combined efforts of buyer 

To this price the actual market price will, according to my view, approximate, ia 
proportion to the intelligence and knowledge of the dealers. 



110 MARKET VALUE. 

and seller, in proportion as they are well informed respecting 
1 the conditions of supply and demand, really converge, '^eal- { 
1 ers thus, while simply pursuing their own interests, are uncon- 
sciously performing for the community a service of first-rate 
\ importance,:*— a service which has been well compared by 
I Archbishop Whately to that rendered by the captain of a 
Uhip, who, taking account of the stock of provisions at his dis- 
posal, and the length of his intended voyage, adjusts to these 
conditions the rations of his crew. Such is the tendency of 
''' the speculation of the market, and the end is attained in pro- 
portion to the intelligence and the knowledge of those who 
engage in the pursuit; and such are the grounds on which 
freedom of commercial speculation may be justified. Of 
course mistakes are often made, sometimes very serious mis- 
takes; and then we have reaction, oscillation, and perhaps 
commercial crises. But under all circumstances the price in 
the market is determined by the opinions of dealers in the 
market, founded upon their knowledge of demand and supply 
— of dealers pursuing their interests under circumstances 
which, in proportion to the intelligence and knowledge at 
their command, favor the establishment of the " proper mar- 
ket price." 

The foregoing is the nearest approximation I can make to a 
statement of the law of market price. I can well believe how / 
utterly unsatisfactory it will appear to some economists, whose 
views in connection with their science are much more ambi- 
tious than my own, and who apparently do not think it hope- 
less that we should have, ere long, an exposition of economic 
principles drawn up in quantitative formulas. That such a 
consummation would be desirable, assuming the exposition to 
be sound, I should be the last to deny, though I own I do not 
expect to witness it ; and I can not but think that, whatever 
may be the case in other instances, at least in that of market 
price the scientific game would scarcely be worth the candle. 



IMPORTANCE OF THE THEORY. Ill 

[In effect, questions respecting market, as distinguished from 
I normal price, are such as do not often meet us in the field of 
I economic or social speculation. The circumstances which gov- 
ern prices in the latter sense ; which regulate the relative pro- 
portions in which the various classes of goods usually ex- 
change ; which cause the prices of some of the most important 
articles of consumption to be 'permanently higher in some coun- 
tries than in others — these are topics of very great moment, 
which have the closest connection with some most important 
questions of national and class well-being. , But the most accu- 
rate determination of the conditions which issue in the price- 
current in a particular market on a particular day, and which 
rule the fluctuations of the market from day to day — however 
important such knowledge may be to the practical merchant 
and speculator — can furnish, so far as I can see, but slight help \ 
toward the solution of any question of large or permanent in- ^\^ 
terest.* I do not, therefore, affect to think that the incom- 



* The announcements of the pending famine in Bengal warn me that it is pos- 
sible to disparage too much the importance of the doctrine of market prices. In 
the comments on this subject by the press of this country, much anxiety has been 
evinced in some quarters lest merchants, by storing supplies, may force up the 
price of food to a famine rate in certain isolated districts. A slight acquaintance 
with the doctrine of market price might sen'e to re-assure such writers. Provided 
that the merchants in question have not the power to exclude supplies from the 
isolated districts, any advance in price beyond what the interest of the consumers 
in the district requires would, as I have shown in the foregoing pages, be at the 
cost of the speculators whose operations produced it. What is desirable is, that 
the price should be raised as soon as possible to a point sufficient at once to com- 
pel the utmost economy in consumption, and to attract supplies from the largest 
possible area. As to the action of the Government for the relief of the famine 
being a "setting aside of the laws of Political Economy," it would be just as rea- 
sonable to talk of precautions against a hurricane, or against a high tide, being a 
setting aside of the laws of physical nature. Will people never understand that 
a "law" of Political Economy is a "law" in no other sense than the law of 
gravitation, and that it is not an act of Parliament, or a rule prescribed by any 
one, which governors-general can " set aside ?" 



112 MARKET VALUE. 

< 

pleteness and imperfection which are apparent enough in this 
portion of economic theory are very much to be deplored. ^ 
So far as the doctrine of market price is concerned, it seems 
to me to suffice for the purposes of Social Philosophy, if we 
are enabled to set forth in a general way the connection be- 
tween the fluctuations of the market and the more fundament- 
al conditions on which production and exchange depend. And 
so much, I venture to think, the theory, as I have stated it, 
taken in connection with the known facts of particular cases, 
will sufficiently enable us to perform. 

§ 5. The foregoing discussion has been confined exclusive- 
ly to the question of prices in wholesale markets; it remains 
to consider the case of retail prices; but these need not detain 
us long. The chief circumstances in which the determination 
of price in retail dealings differs from its determination in 
wholesale markets appear to be these two : first, competition 
in retail markets is conducted under conditions which may be 
described as of greater friction than those which exist in whole- 
sale trade. In the wholesale market, the sellers and purchas- 
ers meet together in the same place, affording thus to each 
other reciprocally the opportunity of comparing directly and 
at once the terms on which they are severally disposed to 
trade. In retail dealing it is otherwise. In each place of sale 
there is but one seller ; and though it is possible to compare 
his terms with the prices demanded elsewhere by others, this 
can not always be done on the moment, and may involve 
much inconvenience and delay. A purchaser frequently finds 
it, on the whole, better to take the word of the seller for the 
fairness of the price demanded than to verify his statements 
by going on the occasion of every purchase to another shop. 
It is probable, indeed, that if the charge be excessive, the pur- 
chaser will in time come to discover this, and may then trans- 
fer his custom to a cheaper market. This shows that compe- 



IN RETAIL DEALING. 113 

tition is not inoperative in retail trade, but it shows also the 
sort of friction under which it works, and helps to explain, 
what has often been remarked upon, and what, as a matter of 
fact, it is practically important people should bear in mind, 
the different prices at which the same commodity is frequent- 
ly found to sell within a very limited range of retail dealing 
— almost in what we may call the same market. This is one 
circumstance that distinguishes retail from wholesale trading. 
The other lies_in__the_ad vantage which his superior knowledge 
gives the^uyer ov^^ the seller in the transaction taking place 
between them — a superiority which has no counterpart in the 
relations of wholesale dealers. In the wholesale market, buy- 
er and seller are upon a strictly equal footing as regards 
knowledge of all the circumstances calculated to affect the 
price of the commodity dealt in. It is the business of each to 
inform himself as to the state of supply and demand, and if 
he fails to do so, he hn^ no just ground of complaint if the 
other party to the transaction gains an advantage in the bar- 
gain. The advantage so obtained is the natural and proper 
reward of the greater skill exhibited — skill which, as I have 
shown, it is for the interest of the community that each should 
cultivate to the highest degree. The circumstances of retail 
dealing are here again in contrast with those of the wholesale 
trade. The transactions do not take place between dealers 
possessing, or with the opportunities of acquiring, equal knowl- 
edge respecting the commodities dealt in, but between experts 
on one side, and on the other persons in most cases wholly 
ignorant of the circumstances at the time affecting the market. 
Between persons so qualified the game of exchange, if the rules 
be rigorously enforced, is not a fair one; and it has conse- 
quently been recognized, universally in England, and very ex- 
tensively among the better class of retail dealers in continental 
countries, as a principle of commercial morality, that the dealer 
should not demand from his customer a higher price for his 



114 MARKET VALUE. 

commodity than the lowest he is prepared to take. Retail 
buying and selling is thus made to rest upon a moral rather 
than upon an economic basis, and, there can be no doubt, 
for the advantage of all parties concerned. The practice, 
however, of unprofitable higgling, as all travelers know, is 
still rife in most parts of the Continent, and, in general, every- 
where among the class of smaller dealers, involving a great 
waste of time, by which perhaps the dealer in the end loses as 
much as he now and then gains by taking advantage of his 
superiority over his customer in knowledge of the game. 

These, it seems to me, are the principal circumstances which 
distinguish the determination of price in the retail trade from 
its determination in wholesale markets; and they suffice to ac- 
count for, what has often been noticed and is indeed a very 
patent fact, the much greater variety to be found in the prices 
of the same and similar commodities in the former than in the 
latter department of business. I do not think thaX fluctuations 
of price (to be distinguished from variety) are greater in the re- 
tail than in the wholesale trade. Perhaps, on the whole, they 
may in this country be somewhat less ; as the practice of hav- 
ing a fixed price for all goods would make the prudent retail 
dealer unwilling to change his price, and so disappoint and 
harass his customer, with every slight fluctuation of the whole- 
sale market. But though fluctuations of price may be some- 
what less, varieties of price are undoubtedly very much great- 
er. Not only in different localities, but often in different shops 
in the same locality, it is quite usual to find the same articles, 
and of the same quality, selling at widely different prices at 
the same time; and this quite in excess of what the special 
circumstances of particular localities or situations might ac- 
count for. This is not a satisfactory state of things ; but 
though perhaps in some degree inevitable, because due to what 
we may regard as essential incidents of retail trading, the evil 
is, at least in this country, greatly aggravated by a cause which 
is quite removable, and which, we may hope, is in process of 



CO-OPERATIVE COMPETITION. 115 

being removed. This is the excessive amount of capital which, 
from one cause or another, has found its way into the business 
of mere distribution. The inevitable consequence is that the 
capital thus in excess, taking it as an aggregate, turns slowly — 
more slowly than it need turn consistently with the due dis- 
charge of its functions; and that those who have embarked in 
retail business are compelled, in order to obtain average profits 
on their capital, to charge higher prices for their goods than 
would be necessary if the total amount of capital in the trade 
were less. That such a state of things should exist and con- 
tinue is doubtless due to that excessive friction in the action 
of competition in retail dealing of which I have spoken. The 
prices charged in different retail establishments are but rare- 
ly compared, and continue consequently to differ widely from 
each other, as they no doubt differ still more widely from what 
they might be in a more healthy condition of the trade. The 
source of the evil is, thus, the sluggish action of competition ; 
and the remedy must be sought in the quickening of this ac- 
tion. This is what the co-operative retail establishments are, 
in effect, doing. By adopting a lower scale of prices, and tak- 
ing good means to advertise their terms, they draw a larger 
amount of custom to their shops in proportion to the capital 
embarked than other competing establishments. The result is 
that, turning their capital more rapidly, they succeed in realiz- 
ing as high profits as their rivals, while charging lower prices. 
The opposition given to this movement by the ordinary retail 
establishments, however little ground for it there may be in 
reason and justice, is perfectly natural, inasmuch as the drift 
of it unquestionably is toward the extrusion of some of them 
from the trade. Nothing less than this, it is clear, will satisfy 
ihe exigencies of the case. What we have to contemplate as 
the proper goal of co-operative competition is a general fall of 
retail prices; but to reconcile this with a realization by the 
whole trade of an average remuneration on the capital embark- 
ed in it, it would be necessary that this capital should be turn- 



116 MARKET VALUE. 

ed over in a given time as often as the capital of the co-opera- 
tors. In order to this, however, the entire capital employed 
in the trade would need to be brought into the same propor- 
tion with the business to be done as the co-operators' capital 
bears to their business — that is to say, the total capital now 
employed in the business of distribution would need to be 
largely curtailed. The necessity of this is not always per- 
ceived ; and people argue that, as the co-operative stores have 
succeeded in turning over their capital rapidly by the expe- 
dient of a reduction in price, so the same end may be attained 
by the retail trade in general through the adoption of the same 
means. But this is just one of those cases, so common in Po- 
litical Economy, in which what is true in particular instances 
ceases to be true when the instances become the rule. How 
is it that co-operators have accomplished the more rapid turn- 
ing of their capital? Simply by drawing off custom through 
the attraction of low prices from other shops. Supposing these 
latter now to adopt the same policy, we may assume that their 
custom would flow back to them. The capital of the whole 
would then turn at the same rate as formerly; but it was just 
this slow rate of turning that necessitated exorbitant prices in 
the retail trade ; and if prices are to range lower, other things 
being the same, profits must decline below their former and 
average level. Other things, indeed, would not, in the case 
supposed, remain for any long time the same ; for a fall in the 
rate of profit would have the effect of driving capital from the 
trade, or at all events of preventing the capital now in the 
trade from being recruited by the accessions that otherwise 
would flow to it. The definitive result toward which such a 
process would tend is manifestly a reduction of the existing 
capital of retail dealing to an amount which would be no more 
than adequate to perform the services required of it. This point 
reached, while the public would enjoy the advantage of lower- 
ed prices, retail dealers would, as a body, derive from their 
investments the rate of remuneration current in the country. 



CHAPTER Y. 

ON SOME DERIVATIVE LAWS OF VALUE. 

§ 1. I PROPOSE to call attention in this chapter to some ex* 
amples of value which I think may not improperly be called 
"derivative laws" of that phenom.enon. I refer to those 
changes in the values of different kinds of commodities which 
occur when the general laws of value, such as we have found 
them to be, come into operation under the actual circumstances 
of progressive societies. 

When a colony establishes itself in a new country, the 
course of its industrial development naturally follows the 
character of the opportunities offered to industrial enterprise 
by the environment. These will of course vary a good deal, 
according to the part of the world in which the new society 
happens to be placed ; but, speaking broadly, they will be 
such as to draw the bulk of the industrial activity of the new 
people into some one or more of those branches of industry 
which have been conveniently designated "extractive." Ag- 
riculture, pastoral and mining pursuits, and the cutting of 
lumber, are among the principal of such industries; and they, 
together with the rude handicrafts immediately dependent on 
them, are what we find, in fact, to be the main occupations of 
all newly-settled communities. Now it is mainly, if not ex- 
clusively, to this class of industrial pursuits that that law of 
Political Economy, or more properly of physical nature, ap- 
plies, which Mr. Mill has rightly characterized as the most im- 
portant proposition in economic science — the law, as he phratieJ 
it, of " diminishing productiveness," Most of my readers will 



118 DERIVATIVE LAWS OF VALUE. 

be familiar with the principle in question, but it may be well 
to recall it here. It may be thus briefly stated: In any 
given state of the arts of production, the returns to human 
industry employed upon natural agents will, up to a certain 
point, be the maximum which those natural agents, cultivated 
with the degree of skill brought to bear upon them, are capa- 
ble of yielding; but after this point has been passed, though 
an increased application of labor and capital will obtain an in- 
creased return, it will not obtain a proportionally increased re- 
turn: on the contrary, every further increase of outlay — al- 
ways assuming that the skill employed in applying it contin- 
ues the same as before^ — will be attended with a return con- 
stantly diminishing. To this principle, in conjunction with 
the varying quality of different soils, is due, as every econo- 
mist knows, the phenomenon of agricultural rent; but this 
has been so fully illustrated in works now in every one's 
hands, in its application alike to agriculture and to other 
branches of extractive industry, that I may content myself 
with merely referring to it here. What I am concerned now 
to show is the manner in which, with the progress of society, 
the law in question affects the course of normal values in all 
commodities coming under its influence. 

The case which I am considering, the reader will remember, 
is that of newly-settled communities, among whom the condi- 
tions of social and industrial life are, on the whole, much more 
equal and uniform than in old countries like this. It results 
that industrial competition among the several social classes 
will at this stage of social growth — unless where restrained by 
laws enacted directly for this purpose — be more general and 
effective than in this part of the world we are accustomed to 
find it; and, as a further consequence from the same state of 
things, it must follow that the principle of cost of production 
as governing value is more extensively operative in such so- 
cieties than with us. For the purposes of our present investi- 



INCREASE OF COST OF COMMODITIES. 119 

gation it will be convenient to assume, and the assumption 
will be sufficiently near the truth, that, in the case of their 
domestic exchanges, the principle in question is operative uni- 
versally. This being so, it is evident that an inquiry into the 
course of normal values in such communities resolves itself 
into an inquiry into the changes which occur in the costs of 
producing the several classes of commodities which are there 
the subject of exchange; these commodities consisting mainly, 
as we have seen, at least during the earlier stages of their 
growth, of the products of extractive industry. 

From the law of diminishing productiveness just referred 
to, taken in connection with the circumstance that the settlers 
in a new country naturally have recourse, in the first instance, 
to those natural agents which, from their superior fertility or 
more convenient situation, promise the largest returns to in- 
dustry, it follows that, as population increases and larger de- 
mands are made upon the resources of the country, the cost 
of producing commodities tends constantly to rise. This tend- 
ency may indeed be counteracted by the progress of mechan- 
ical and chemical invention, and the improved industrial proc- 
esses which usually result. But, in point of fact, it has never 
been found in the history of any country, that such inventions 
have kept pace with the declining rate of return yielded by 
natural agents, as their capabilities have been subjected to the 
increasing demands of a growing community ; and it is there- 
fore safe to assume that the tendency to an increase of cost 
in the class of commodities under consideration would in any 
actual case be realized. The degree, however, in which this 
result occurred would be very different in different kinds of 
"extractive" products, and this would lead to corresponding 
differences in the course of their normal values. 

§ 2. The class of commodities in the production of which 
the facilities possessed by new communities, as compared with 



12a BEBIVATIVE LAWS OF VALUE. 

old, attain their greatest height, are those of which timber and 
meat may be taken as the t3'pe, and comprises such articles as 
wool, game, furs, hides, horns, pitch, resin, etc. The character- 
istic of all such products is, that they admit of being raised 
with little previous outlay, and, therefore, with comparatively 
little capital, and in general require for their production a 
large extent of ground. Now capital is the industrial agent 
which new countries are least able to command, while they 
commonly possess land in unlimited abundance. There can, 
therefore, be no difficulty in perceiving that, for the produc- 
tion of the class of commodities mentioned above, newly -set- 
tled communities are especially adapted, and that, consequent- 
ly, the value of all such commodities will be in them excep- 
tionally low. 

The circumstance which most powerfully affects the course 
of values in the products of extractive industry, and in the 
commodities just referred to among the rest, is the degree in 
which they admit of being transported from place to place, 
that is to say, their portableness, depending, as it does, partly 
on their durability and partly on their bulk. Taking timber 
and butcher's meat as exemplifying respectively a high and a 
low degree of portableness, we find that while the values of 
both range in new countries, where the circumstances are fa- 
vorable for their production, at a very low point compared 
with their values in old, the difference is, even at the outset, 
considerably greater in the case of meat than in that of tim- 
ber ; and further, that, while the value of the latter rises in 
general slowly, and never attains a very great elevation, reck- 
oning from its height at starting, that of the former rises more 
rapidly, and continues to rise with the growth of the commu- 
nity, the highest point which it is capable of attaining being, 
in the present state of our knowledge at least, quite indeter- 
minable. The explanation of this contrast lies entirely in the 
circumstance to which I have adverted — the different portable- 



MEAT AND TIMBER. 121 

ness of the two commodities. Timber, notwithstanding its 
bulk, being a very portable commodity, easily finds its way 
from the forests of new to the markets of old countries. As 
soon, therefore, as a new community is brought into commer- 
cial connection with the more advanced parts of the world, 
if timber be there an article of production, its price will at 
once rise to a level lower than that prevailing in old countries 
only by the cost of transport. This, no doubt, in so bulky a 
commodity, will represent a considerable proportion of the 
whole value ; but the important point to attend to is that the 
price thus determined will in future bear a constant relation to 
the price in old countries;* the difference between the two be- 
ing always such as the cost of transport will render it. Meat, 
on the other hand, unsuited as it is, owing to its perishable na- 
ture, for a distant traffic, is confined for a market, if not to the 
immediate locality where it is produced, at least to the border- 
ing countries; and being raised in new countries at very low 
cost, its value during the early stages of their growth is neces- 
sarily low. But as population advances, and agriculture en- 

* It is not to be supposed from this that the price, as compared with that of oth- 
er commodities raised within the same district, will cease to be determined by its 
cost of production. If, for example, the opening afforded bj' foreign markets had 
the effect of raising the price of timber above the point prescribed by its cost of 
production as compared, let us say, with agricultural products, the higher profits 
of the lumber trade, in the circumstances supposed, would have the effect of draw- 
ing off capital and labor from agriculture to lumber cutting. The curtailment of 
the area of cultivation in agriculture would be attended with a reduction in the 
cost of its products, involving, cceteris paribus, an advance in agricultural profits; 
while, on the other hand, the extension of the field of production in lumber cut- 
ting, necessitating a resort to more distant forests, would be followed by the oppo- 
site effect ; and this process would manifestly go on till the prices of timber and 
agricultural products were brought into relation with their respective costs. The 
normal price of timber, therefore, would still be such as its cost of production pre- 
scribed ; but this cost of production, as happens with the products of all extract- 
ive industry, would tend to rise with the increased demands made upon the nat- 
ural agent. 



122 DERIVATIVE LAWS OF VALUE. 

croaches on the natural pasture lands originally available for 
the rearing of cattle, still more as it becomes necessary to cul- 
tivate land for the purpose of pasture, the cost of meat con- 
stantly rises. It was the opinion of Adam Smith, that, so 
soon as this last stage was reached, the price of all " extractive " 
products of whatever kind attained its maximum height, and 
that no farther advance (unless so far as this might arise from 
a fall in the value of money) was henceforth to be expected. 
The only reason he assigns for this opinion is, that if the price 
rose higher, " more land would soon be turned to that pur- 
pose."* I need scarcely point out the entire inadequacy of 
this reason. More land no doubt would be turned to the pro- 
duction of the article, whatever it might happen to be, the ad- 
vancing price of which made it profitable to cultivate land for 
this purpose ; but it does not follow, that, as the extension of 
cultivation went on, the cost of production, and with it the 
price of the article, would not rise. On the contrary, this is 
what we know does happen, and has happened in a signal 
manner in the case of meat. The same cause which depresses 
the price of meat in the earlier stages of a nation's career — its 
perishable nature and consequent unfitness for transport — op- 
erates to raise the price in' the later stages by practically con- 
fining each country to what it can itself produce. It is thus 
led with the increasing demands of a growing population to 
extend the supply at a constantly increasing cost. The price 
of meat, accordingly, has, since the time of Adam Smith, 
though with numerous fluctuations, on the whole steadily ad- 
vanced; and, notwithstanding the unexampled height which 
it has now attained in this country, when one considers the 
peculiar place which meat holds in the dietary of the masses 
of a people — that it is the article on which, in the event of any 
improvement in their condition, increased expenditure most 

* "Wealth of Nations," pp. lOl-i, 6. 



GEAIN. 123 

certainly finds vent — one can not doubt but that its progress 
must still be upward,* even irrespective of the depreciation of 
money now going on, which can not fail to accelerate the 
movement. 

§ 3. Next to those products of extractive industry of which 
meat and timber are the type, and which exhibit in the high- 
est degree the special productive aptitudes of new countries, 
the commodity which offers greatest scope for their special re- 
sources is grain. The course of normal price in this article 
differs in a very striking way from that of those which we 
have just considered. Like theirs, indeed, the course is up- 
ward ; and like that of timber — corn being also an extremely 
portable commodity — the price is at an early stage brought 
into relation with the quotations ruling in the great markets 
of the world ; with this difference, however, that the cost of 
carriage being for corn, in proportion to its value, much less 
than for timber, its price in the new community approximates 
more closely to its price in old countries than does that of the 
latter commodity. But the noteworthy circumstance in the 
course of price in corn — so far at least as corn forms the staple 
food of a people — is that advancin"^, with of course much fluc- 
tuation, in the early period of growth, it at length in the prog- 
ress of industrial development reaches a point beyond which 
(unless so far as it is affected by changes in the value of mon- 
ey) it manifests no tendency, at least no permanent tendency, 
to advance farther. I am not aware that this peculiar incident 
in the price of corn has been pointed out before, and it is 

* In connection with this subject one perceives the immense national impor- 
tance of inventions bearing on the preservation of meat, and of the development 
of a trade in preserved meats, between new countries like Australia and old ones 
like this. It is satisfactory to find that some progress has been made in this di- 
rection ; but apparently the art will need great improvement before the preserved 
meats of Australia can enter largely into our general consumption. 



124 DERIVATIVE LAWS OF VALUE. 

possible it may* be disputed as a matter of fact : nevertheless, 
I make the assertion with some confidence, inasmuch as I find 
grounds for it in the economic conditions under which corn is 
produced, taken in connection with the purposes to which it 
is applied. Corn is raised at various costs, according to the 
character of the land and the degree of skill employed in its 
cultivation ; but, as every economist knows, the cost which 
governs the price of corn is the cost of the most costly portion 
brought to market. In the early stages of a nation's career, 
as with the increase of population resort is had to more distant 
and inferior soils, the cost of this most costly portion steadily 
rises, and along with it the normal price of corn. But an in- 
crease in the cost of corn means a diminished return on the in- 
dustry employed in producing it; and this diminished return 
— corn being the principal article of the laborer's consumption 
— involves for him diminished means of support. It needs 
but slight reflection to perceive that this circumstance contains 
within it a necessary limit to the increasing cost of producing 
corn, and, consequently, to the advance in its price. In the 
case of what we may call secondary articles of consumption, 
such as meat and dairy produce, the same consequence does 
not arise, because an advance in the price of such commodities, 
entering as they do but sparingly into his consumption, falls, 
by comparison at least, lightly on the laborer. These articles 

* Unless Adam Smith's view as to the steadiness of the price of corn, compar- 
ing century with century, in contrast with the market fluctuations from year to 
year, be considered as tantamount to it, Mr. Mill, indeed, has controverted 
Adam Smith's doctrine, which, he says, "we now know to be an error. Corn 
tends to rise in cost of production with every increase of population, and to fall 
with every improvement in agriculture, either in the country itself, or in any for- 
eign country from which it draws a portion of its supplies" ("Principles of Polit- 
ical Economy," vol. ii., p. 104). I venture here to take side with Adam Smith ; 
for though the tendencies pointed out by Mr. Mill do exist and operate, their 
operation, as I think I have shown in the text, is not inconsistent with the sub- 
stantial truth of Adam Smith's assertion. 



GRAIN. 125 

may continue to rise indefinitely, and yet population may 
continue to live and grow. But an advance in the price of 
the staple food, after it attains a certain elevation, inevita- 
bly reacts on population, and, checking the demand, arrests 
the extension of cultivation, and by consequence, the ad- 
vance of normal price. The progress of industrial inven- 
tion comes no doubt in time to affect the course of agri- 
culture, and then ensues a succession of cyclical movements 
which may be thus described. The cost of producing 
corn on the worst soils cultivated is cheapened: the normal 
price of corn for a time falls: the condition of the laborer 
improves, and with the improvement in his condition he mar- 
ries earlier, and brings up a larger family : population increases, 
and, the demand for food increasing with it, cultivation is ex- 
tended to soils which, previous to the introduction of the 
better agricultural processes, could not have been profitably 
cultivated; at length the "margin of cultivation" attains a 
range where the inferior quality of the natural agents brought 
into requisition just neutralizes the gain derived from the ad- 
vance in agricultural skill. At this point the cost of produc- 
ing the most costly portion of the nation's food is just where it 
was before improved processes had been introduced into agri- 
culture ; and the normal price of food attains its former eleva- 
tion. The laborer's condition, unless so far as the standard of 
comfort has been raised in the interval, returns to its former 
level ; and the high rates of subsistence once more react on and 
control population. Under the influence of a play of motives 
of this kind, the normal price of corn has in all long- settled 
countries been kept, as a permanent state of things, within the 
limit which it had reached at a comparatively early stage of 
their career, in this respect strongly contrasting with the course 
of price in meat, and in most other secondary articles of con- 
sumption. M. Cherbuliez,* in connection with this subject, 

* "Precis de la Science Economique," vol. i., pp. 356, 357. 



126 DERIVATIVE LAWS OF VALUE. 

has remarked that, comparing the present prices of meat and 
corn in the countries of Western Europe with their prices in 
former times, it has been found that, in the same period in 
which the price of corn has risen in the proportion of one to 
two, the price of meat has risen in the proportion of one to ten. 
I venture to assert that, at all events since the beginning of 
the seventeenth century,* the normal price of wheat has not 
risen in England more than the depreciation of the precious 
metals since that time will fully account for. According to 
Adam Smith, the average price of wheat during the first sixty- 
four years of the eighteenth century ruled at about twenty- 
eight shillings the quarter, and this price he considered some- 
what lower than it would have been had not the period been 
marked by an unusual number of good harvests. In the last 
sixty-four years of the preceding century, the price of wheat, 
according to the same authority, stood somewhat higher. Tak- 
ing the whole hundred and twenty -eight years, the average 
price of wheat probably might be taken as ruling between 
thirty and five-and-thirty shillings. Its price in average years 
now would, I apprehend, stand at somewhere about fifty shil- 
lings the quarter ; and the difference is certainly not more than 
a reference to the diminished value of money would explain. 
The reader will not understand me as adducing these rough 
and summary statements in proof oi the principle to which I 
am calling attention. I give them merely for the purpose of 
illustration; but I have little doubt that, if the question were 
gone into statistically, and due allowance made for changes in 
the value of money, the results would bear out the conclusion 
at which, on purely economic grounds, I have arrived. 

* I have no doubt the date might be put some centuries farther back ; but as the 
question of price in the preceding centuries becomes complicated by the combined 
effect of the depreciation of money and the deterioration of the standard coin, and 
as my object is to illustrate my position, not to prove it, I think it better to avoid 
entering on ground that might be disputed. 



COURSE OF CULTIVATION. 127 

§ 4. One or two consequences involved in the state of things 
I have been describing it may perhaps be worth while here to 
point out. We have seen that in the early stages of a nation's 
history the tillage of the soil steadily encroaches upon pasture 
farming, until the latter becomes at length itself a branch of 
agriculture. A little later on, the nation, instead of being an 
exporter of agricultural produce, becomes an importer; and 
then agricultural industry takes a new turn. Corn can now 
be imported from abroad, but meat can not ; and, whether im- 
ported or produced at home, the price of corn, for the reasons 
I have stated, has no tendency to rise permanently beyond the 
level it has already attained, whereas the price of meat may 
advance indefinitely. It follows from these facts that, as the 
nation increases its numbers and needs augmented supplies of 
food, it naturally resorts to foreign countries to supplement the 
deficiency in its corn supply, while the additions needed to its 
supply of meat are obtained by extending the area under pas- 
ture at home. The constant tendency, accordingly, of tillage 
to encroach upon pasture, which up to this time had been the 
law of industrial progress, is now reversed ; and from this 
point the area of pasture tends steadily to increase, that of till- 
age to diminish. The stage in question had been reached by 
England just about the time that Adam Smith wrote; and 
notwithstanding the powerful obstacles offered by wars and 
corn-laws to the natural course of development, the movement 
of agriculture has, on the whole, been in the direction I have 
indicated. At the present time it is decidedly and unequivo- 
cally so, and indeed I believe the fact is very generally recog- 
nized. Another consequence depending on the same causes 
is exhibited in the movements of agricultural rent. In the 
early periods of a nation's history the lands from which the 
highest rent can be obtained are those which offer the greatest 
advantages for tillage, while pasture lands, owing to the low 
price of their produce, yield comparatively low returns in rent 



128 DERIVATIVE LAWS OF VALUE. 

But so soon as that stage in its advancing career is reached 
when corn begins to be imported from abroad, and meat is 
raised by extending the area of pasture, the lands which thence- 
forward yield the highest rent are those whose special excel- 
lence lies in the rearing of cattle. I have no statistics which 
would enable me to illustrate this point, but the inference from 
the facts of the case is so plain that I think it may be advanced 
with little hesitation. There will be lands, no doubt, which 
may equally well be turned to either purpose ; but where 
lands have special aptitudes for one of the two, those which 
are fitted in the highest degree for the raising of meat (and 
with meat we may include dairy produce, hops, and in general 
those articles which I have called " secondary " in relation to 
human requirements) are, I venture to think, those from which 
after the period indicated the highest rent will be obtained. 

§ 5. There is a class of commodities which in the industry 
of newly - settled countries occupies an important place, the 
course of whose values is affected by rather peculiar conditions. 
I refer to what are called " accessory products " — commodities 
which are produced, not separately, but as parts of a common 
industry, and of which the most obvious examples are mutton 
and wool, beef, tallow and hides, gas and coke, and the like. 
As regards the values of such commodities, the general law 
determining them has been stated by Mr. Mill in his chapter 
on "Some Peculiar Cases of Yalue."* It is to the following 
effect: Cost of production here operates, but in a peculiar 
manner : it determines, not the price of each of the articles 
conjointly produced, but the sum of their prices; "their val- 
ues relatively to each other being those which will create a 
demand for each in the ratio of the quantities in which they 
are sent forth by the productive process." The working of 

* "Principles of Political Economy," vol. ii., book iii., chap. xvi. 



"ACCESSORY PBODUCTS." 129 

this principle, under the changing circumstances of advancing 
communities, is what I desire now to call attention to. 

I have already explained the course of price in one of the 
most important of those commodities — butcher's meat ; and it 
was then seen how powerfully that course is affected by the 
difficulty of carriage incident to that article. On the other 
hand, the facility with which the products accessory to the 
production of butcher's meat, wool, tallow, and hides, are con- 
veyed, is not less powerful in the opposite sense in affecting 
the course of their prices. Wool, for example, rises at once in 
a new country to the price ruling in the great markets of com- 
merce, minus only the cost of carriage, which, owing to the 
great portableness of wool, bears but a small proportion to its 
total value. In other words, the demand for wool, let us say 
for wool grown in Australia, is only limited by the demand 
of the entire commercial world ; while the demand for meat 
raised in the same country is practically confined to the local 
markets. It is evident that this circumstance must lead, in the 
industrial development of the colony, to a complete divergence 
in the courses of price of the two commodities. Indeed, that 
divergence has already become very sensible ; for though it is 
true an advance has occurred in the price of wool since the 
early days of Australian settlement (mainly due, as I believe, 
to a fall in the value of money), the price of meat has advanced 
in a far greater degree. Nor is it difficult to foresee that it is 
in the directions thus indicated that the future prices of the 
two commodities will move. In both cases there will prob- 
ably be an advance due to the declining value of gold; but 
the price of meat will be urged upward by other, and inde- 
pendent, causes. The durable character and slight bulkiness 
of wool, which even in the infancy of the colony sustained its 
price at a level but little below that of European markets, will, 
in later times, when the now sparse communities of Australia 

have grown into nations, confine it within limits not greatiy 

9 



130 DEEIVATIFE LAWS OF VALUE. 

larger than it now commands, by furnishing the same facilities 
for its importation which they now furnish for its exportation 
— a result exactly the converse of what we found to be the 
fate of meat, of which the perishable nature, as it excludes it 
from exportation when nations are young, so prevents its im- 
portation, at least on any great scale, when the increasing de- 
mand of the growing community outruns the internal facilities 
of production. 

§ 6. In comparing the state of prices in old and new com- 
munities, the circumstance in which they stand perhaps most 
strikingly contrasted is that which has been brought out in 
the foregoing discussion — the remarkable difference found to 
exist in the two cases between the relative prices of corn or 
other products of prime necessity, on the one hand, and, on 
the other, those of butcher's meat, dairy produce, and such 
secondary commodities. The contrast was not unperceived 
by Adam Smith, and has been commented on at much length 
in the very interesting chapter in the "Wealth of Nations" 
which he devotes to this subject. The notion, however, which 
he had taken up as to a limitation, developed with the prog- 
ress of society, to the advancing price of the latter class of 
articles, prevented him from seeing the full significance of the 
facts to which he drew attention; nor indeed are his infer- 
ences, even within the range of what he had perceived, abso- 
lutely unexceptionable. Nevertheless, his remarks in sum- 
ming up the results of his investigation are sufficiently strik- 
ing, and may fitly be quoted here : 

" But thougli the low money price either of goods in general, or of 
com in particular, be no proof of the poverty or barbarism of the times, 
the low money price of some particular sorts of goods, such as cattle, 
poultry, game of all kinds, etc., in proportion to that of corn, is a most 
decisive one. It clearly demonstrates, first, their great abundance in 
proportion to that of com, and consequently the great extent of the 



MINERAL PRODUCTS. 131 

land which they occupied in proportion to what was occupied by corn ; 
and, secondly, the low value of this land in proportion to that of corn 
land, and consequently the uncultivated and unimproved state of the 
far greater part of the lands of the country. It clearly demonstrates 
that the stock and population of the country did not bear the same pro- 
portion to the extent of its territory which they commonly do in civil- 
ized countries, and that society was at that time, and in that country, 
but in its infancy. From the high or low money price either of goods 
in general, or of com in particular, we can infer only that the mines 
which at that time happened to supply the commercial world with gold 
and silver were fertile or barren, not that the country was rich or poor. 
But, from the hjgh or low money price of some sorts of goods in propor- 
tion to that of others, we can infer, with a degree of probability that 
approaches almost to certainty, that it was rich or poor, that the gi'eater 
part of its lands were improved or unimproved, and that it was either 
in a more or less barbarous state, or in a more or less civilized one." 

Strictly interpreted, the line of this inference would lead to 
the conclusion that Australia and California were poor coun- 
tries, which would scarcely be considered a tenable position : 
but, barring this slip, as we may regard it, of substituting 
"rich and poor" for "old and young," the tenor of the re- 
marks is essentially sound and just, and shows, considering 
the time when they were written, a remarkable insight into 
the causes governing industrial development. 

§7. There is another class of "extractive" commodities 
which does not fall properly under any of the foregoing heads, 
on which a few remarks seem called for here. These are 
mineral products, comprising the coarser and precious metals, 
eoal, and a few other articles. The circumstances in which 
products of this class differ from those which we have just 
considered appear to be chiefly these two : In the first place, 
the sources from which they are obtained are distributed over 
the earth with very great inequality ; some countries being en- 
tirely destitute of them, others possessing thera in great aOurt- 



133 DERIVATIVE LAWS OF VALUE. 

dance, and of the most varied degrees of fertility ; and, sec« 
ondlj, their production is more mechanical in its nature than 
that of agricultural or pastoral products, from which it results 
that their cost of production is more directly dependent, than 
that of other rude products, on the progress of mechanical and 
chemical invention. To follow out the consequences involved 
in these distinctions, more especially in the instance of the 
precious metals, would take me very far afield indeed ; noi do 
I propose to attempt any such excursion here. I shall content 
myself, as regards this part of my subject, with observing in a 
general way, that the circumstances of the case have been con- 
ducive in the past history of the world to great variation in 
the normal prices of mineral products ; nor can it be said, in 
spite of the fact that they come so largely under the influence 
of scientific invention, that the movements of normal price in 
their case have, with the progress of communities, been in any 
constant direction. As regards future movements of price in 
this class of products, so much depends on the discovery of 
new mines and coal measures, and this is so much a matter of 
accident, so large a portion of the world, moreover, still re- 
mains unexplored, that I do not think we can be said to pos- 
sess the data for even a probable conjecture. 

§ 8. I turn now from the domain of raw products to that 
other great industrial division — manufacturing industry. Be- 
tween these two industrial departments it is not indeed possi- 
ble to draw a perfectly hard and fast line, nor is it at all neces- 
sary that we should do so ; it is sufficient that the designations 
— raw products and manufactured goods — indicate a real and 
important distinction in things, and one which will be easily 
and with sufficient correctness apprehended. What I have 
now to consider is the course which normal prices take with 
the progress of society in the latter of these two classes. 

And here this remark may at once be made : that, as the 



MANUFACTURES. 133 

course of price in the field of raw products is, on the whole, up- 
ward, so in that of manufactured goods the course is, not less 
strikingly, in the opposite direction. The reasons of this are 
exceedingly plain. In the first place, division of labor — the 
first and most powerful of all cheapeners of production, but for 
which there is in extractive industry but very limited scope — 
finds in manufacturing industry an almost unbounded range 
for its application; and, secondly, it is in manufacturing indus- 
try also that machinery, the other great cheapener of produc- 
tion, admits of being employed on the largest scale, and has in 
fact been employed with the most signal success. It follows 
at once from these facts, taken in connection with the further 
fact that industrial invention does not take place per scdtum, 
but gradually — one invention ever treading on the heels of an- 
other — and that its advance seems to be subject to no limita- 
tion ; it follows, I say, from these considerations, that that por- 
tion of the cost of manufactured goods which properly belongs 
to the manufacturing process must, with the progress of society, 
undergo constant diminution. We can not, indeed, infer di- 
rectly from this circumstance that the value of such goods 
must decline, because the manufacturing process represents but 
a portion of their cost, which also embraces that involved in 
raising the raw material out of which they are manufactured; 
and we have already seen that the cost of this element tends to 
advance with the progress of society. Whether, therefore, the 
price of manufactures will advance or decline must depend 
upon whether the tendency to fall, incident to improvements in 
the manufacturing process, will, on the whole, prevail over the 
tendency to advance inherent in the raw material, or be sur- 
passed by the latter force. On this point, however, save in the 
case of a few very slightly manufactured articles, such, for ex- 
ample, as bread, in which the manufacturing process bears but 
a small proportion to the value of the raw material, there is no 
room for a moment's doubt. In all the great branches of man- 



134 DERIVATIVE LAWS OF VALUE. 

ufacturing iodustry the portion of the cost incurred in the man- 
ufacturing process bears in general a large proportion to that 
represented by the raw material, while the influence of indus- 
trial invention, in reducing this portion of the cost, is, as every 
one knows, great and unintermitting in its action. From all 
these circumstances it results that the tendency to a reduction 
of cost in manufactured goods must, at least as the conditions 
of production stand at present, prevail, and in most cases pre- 
vail largely, over the tendency to an increase ; and that conse- 
quently the course of normal prices in this class of commodities 
is, with the progress of society, inevitably and, at times, rapid- 
ly downward. The illustration of this truth is to be found in 
the history of all manufiicturing countries, and pre-eminently in 
that of Great Britain. There are few commodities of any im- 
portance falling within the domain of manufacture which have 
not within the last century or two fallen to a small fraction of 
their former price. 

But among manufactured commodities, as among raw prod- 
ucts, there is a difference. As has just been stated, the two 
great cheapeners of production are division of labor and ma- 
chinery^, and the degree in which these admit of being ap- 
plied to manufacture is mainly dependent upon the scale on 
which the manufacturing process is carried on. Those manu 
foctures, therefore, that are produced upon a large scale are the 
sort of manufactures in which we may expect to find the great- 
est reduction in cost; in which, therefore, the fall in price, with 
the progress of society, will be most marked. But the manu- 
factures which are produced upon the largest scale are those 
for which there exists the largest demand — that is to say, are 
those which enter most extensively into the consumption of 
the great mass of the people. They are also, I may add, those 
in which a fall in price is apt to stimulate a great increase of 
demand. All the common kinds of clothing, furniture, and 
utensils fall within the scope of this remark ; and it is in these, 



MANUFACTURES. 135 

rather than in the commodities consumed exclusively or main- 
ly by the richer classes, that we should, accordingly, expect to 
find the greatest marvels of cheapening. There is indeed one 
incident of the case the bearing of which, so far as it goes, 
would, as between the two classes, rather favor the reduction 
of the more luxurious products. The manufactured articles 
which enter into the consumption of the masses are, as a rule, 
less manufactured than those which enter into the consump- 
tion of the rich — in other words, the amount of manufacture 
bestowed upon them bears a smaller proportion to the raw 
material than is the case with the more elaborate manu- 
factures. Such coarser manufactures, therefore, would feel 
the effects of the advancing cost of the raw material more 
sensibly than the refined sorts. Thus, for example, compar- 
ing a piece of Brussels lace with a piece of common calico, 
it is evident that there would need to be a very great change 
indeed in the value of the raw material to produce any sen- 
sible effect in the price of the former article; whereas, as 
recent experience has taught us, an advance in the price of 
the raw material of common calico is capable of causing very 
serious effects in its price. This circumstance, therefore, so 
far as it goes, certainly favors in the race for cheapness the 
more luxurious as against the commoner and less elaborate 
manufactures. Nevertheless, it can not be supposed to com- 
pensate the advantages due to the causes I have pointed out 
which fall to the share of the commoner sorts. It is in this 
class of goods that the most remarkable reductions in price 
have been accomplished in the past; and it is in them probably 
that we shall witness in the future the greatest results of the 
same kind. 

§ 9, Hitherto I have examined the derivative laws of value 
in so far only as they are exemplified in the movements of 
normal prices. It will be interesting now to consider whether 



136 BEBIVATIVE LAWS OF VALUE. 

it is possible to discover in the movements of market prices 
any corresponding phenomena; whether, that is to say, the 
fluctuations of the market, as they occur in the several classes 
of commodities, conform to any modes of action analogous to 
those which we have found to obtain in the case of normal 
price. 

^/^And here it may be well to state precisely what is to be un- 
/^ derstood by a "fluctuation of the market," as distinguished 
from those changes of normal price which we have been con- 
sidering. Normal price, as we have seen, is governed, accord- 
ing to the circumstances of the case, by one or other of two 
causes — cost of production and reciprocal demand (in the sense 
explained in a former chapter). A change in normal price, 
therefore, is a change which is the consequence of an alteration 
in one or other of these conditions. So long as the determining 
condition — be it cost of production or reciprocal demand — re- 
mains constant, the normal price must be considered as remain- 
ing constant; but, the normal price remaining constant, the 
market price (which, as we have seen, depends on the opinion 
of dealers respecting the state of supply and demand in rela- 
tion to the particular article) may undergo a change— may de- 
viate, that is to say, either upward or downward from the nor- 
,mal level. Such changes of price, occurring while the perma- 
nent conditions of production remain unaffected, can only be 
temporary, calling into action as they do forces which at once 
tend to restore the normal state of things : they may, there- 
fore, be properly described as "fluctuations of the market;" 
and the question now to be considered is how far we can con- 
nect such phenomena with the causes which determine them, 
and, by stating this connection, bring them within the domain 
of scientific law. 

With a view to this inquiry, the first point to be attended to 
is the condition on which the correspondence of market with 
normal price depends. It is evident that this condition can be 



MARKET FLUCTUATIONS. 137 

no other than such an adjustment of supply to demand — or, to 
speak more strictlj'', such a state of opinion among dealers re- 
specting the adjustment of supply to demand — as shall produce 
the correspondence in question — a state of things which is re- 
alized when the disposable supply is regarded as sufficient, and 
no more than sufficient, to satisfy the demand for the commod- 
ity which exists at the normal level of price, or, as we may 
say, in Adam Smith's phrase, to satisfy the "effectual de- 
mand." Bearing this in mind, it will be seen that the devia-" 
tion of the market price from the normal standard will be 
mainly influenced by the difficulties in the way of adapting 
supply to " effectual demand ;" or, what comes to the same 
thing, that the closeness with which the market follows the 
normal price will depend upon the facilities available for this 
adaptation. On what, then, do these facilities depend ? Chief- , 
ly, it appears to me, on the three following circumstances :( 
first, on the conditions of production as affecting the commod- 
ity; secondly, on the nature of the commodity; and thirdly, 
on the greater or less urgency of human wants in relation to it. 
In tracing the derivative laws of normal prices we found 
that the most fundamental distinction between commodities, 
with a view to the purpose then in hand, lay in the line of sep- 
aration between the products of extractive and those of manu- 
facturing industry. For our present purpose the same dis- 
tinction is equally important ; and I shall, therefore, once again 
adopt it, Kegarding, then, commodities as falling under one 
or other of these two great heads, let us observe how, on the 
one hand, manufactures, on the other, agricultural and pastor- 
al products, stand affected by each of the three conditions just 
named. 

§ 10. Taking manufactures first, it is evident at once that, 
as regards conditions of production, the circumstances of the 
case are such as to secure, in general, great rapidity and also 



138 DERIVATIVE LAWS OF VALUE. 

great certainty in bringing commodities to market. A deal 
table may be made in a few hours, a piece of cloth in a few 
weeks, a moderate-sized house in a month or little more. Ta- 
bles, cloth, and houses may be produced with certainty in 
any quantity required. It results from this, that it is scarcely 
possible that, under ordinary circumstances, the selling price 
of a product of manufacture should for any long time much 
exceed its normal price ; for so soon as the excess became pal- 
pable, inasmuch as this would imply exceptionally high prof- 
its for the producers, production would receive a stimulus; 
and, the facilities for producing the article being great, the 
supply would quickly be increased until it overtook the "ef- 
fectual demand ;" whereupon the market price would fall to 
the normal level. This, I say, is what would happen " under 
ordinary circumstances;" for in order that the supply should 
be thus rapidly adjusted to the increase of demand, it would 
be necessary that the latter should not exceed certain limits. 
In all the most important branches of manufacture fixed cap- 
ital, chiefly in the form of machinery, is largely employed ; 
and the limited quantity of such capital existing in a country 
at any time sets limits for the time being to the possible aug- 
mentation of supply. If the demand then exceed what the 
means of production thus immediately available can satisfy, 
the market price may rule for some considerable time in ad- 
vance of the normal price— until, that is to say, time is allow- 
ed for erecting buildings and machinery suitable to the in- 
creased requirements of the community. Even on such oc- 
casions, however, it is rare that the elevation of price which 
results is very great; for here come into play those other con- 
ditions of which I have spoken. The nature of manufactures 
is, in general, such as to fit them admirably for distant trans- 
port. Any considerable elevation of price, therefore, is pretty 
certain to attract supplies from remote sources. Further, con- 
sidered in their relation to human needs, I think it may be 



FL UCTUA TION IN MANUFA C TUBES. 139 

said of manufactured goods, that either the need for them is' 
not very urgent, or, where it happens to be so, substitutes 
more or less suitable for the commodity or commodities which 
happen to be scarce may, in general, easily be found. From 
all these circumstances it results that an advance in the price 
of a manufacture, so soon as it becomes at all considerable, 
either attracts supplies from extraordinary sources, or deters 
purchasers, or brings substitutes into the field — by one or 
more of such means setting a limit to deviations, and prevent- 
ing any great departure from the usual terms of the market. 

So far as to deviations from the normal standard upward. 
With regard to movements in the opposite direction, the cir- 
cumstances under which they occur are commonly of this 
kind. The adaptation of supply to demand is a tentative proc- 
ess, and when any sudden change in demand happens, it is 
not easy for producers at once to determine its extent. The 
result is that mistakes are made. Commodities are produced 
in excess: nay more, fixed capital is created in excess; and 
capital once committed to a "fixed" form is rarely capable of 
being applied to any purpose other than that for which it was 
intended. Hence, the supply once carried beyond the due 
limits of the " effectual demand," it becomes difficult to reduce 
it to its proper proportions. Mills and machinery once set up, 
it is of two evils often the least to continue production at a 
moiety, or less, of the ordinary profit, rather than to allow cap- 
ital to lie absolutely unproductive : one hears besides that 
production, from motives of humanity to the workmen em- 
ployed, is sometimes carried on even at a loss. Owing to 
causes of this kind, the markets for manufactured products 
sometimes continue for many months, possibly for a year or 
more, below the level of normal price. Here again, however, 
the same qualities which, as we saw, keep in check the up- 
ward movement, come into play to prevent a very great de- 
pression. Manufactures not being in general quickly perish- 



140 BEEIVATIVE LAWS OF VALUE. 

able, it is rarely necessary, in their case, to force a sale, while 
their great portability gives them access to distant markets. 
On the whole, then, we find that, having regard alike to the 
conditions of production, the nature of the commodity, and the 
degree of urgency of human needs in relation to it, the cir- 
cumstances of the case are such as to reduce within rather 
narrow limits the fluctuations of the market in the instance 
of manufactured goods.* And this is the more noteworthy, 
inasmuch as it is precisely in this class of commodities that, as 
we have seen, the changes in normal price, depending as they 
do on changes in the cost of production, are most frequent and 
most striking. 

The state of things just described, and which exhibits, on 
the whole, a somewhat limited range of variation for the mar- 
ket (as distinguished from the normal) value of the products of 
manufacturing industry, might at first sight seem to offer but 
small scope for the sudden creation by individuals of large for- 
tunes; and yet we know that it is in manufacturing indus- 
tries that the largest and most rapid fortunes have been made. 
What is the explanation of this circumstance? I apprehend 
it will be found to lie mainly in the rapidity with which the 
circulating portion of manufacturing capital admits of being 
turned. The same rapidity of production which accelerates 
the reduction of price facilitates the turning of capital. Ac- 
cordingly, when such a chance occurs as the sudden opening 
of a large and unlooked-for market — such an occasion, for ex- 
ample, as was presented by the rapid growth of the markets 
of California and Australia consequent on the gold discoveries ; 
or again, such as the American civil war produced for the 

* The chief exception to this is where a fluctuation of the market connects it- 
self with some irregularity in the supply of the raw material, as happened during 
the cotton famine. But in this case the phenomenon should rather be considered 
as falling under our next head, which deals with the market fluctuations of raw 
products. 



FLUCTUATION IN BAW PRODUCTS. 141 

linen manufacturers, when the failing supply of calico threw 
a large and unexpected consumption upon linen — when, I say, 
occasions of this kind occur, those whose capital is already 
embarked in the trade can generally — such are the facilities for 
rapidly turning capital over in manufactures — contrive, even 
at a moderate advance of price, to realize large gains before 
the re-enforcements of fixed capital rendered necessary by the 
altered state of trade can be brought into the field. This is 
one, and the principal, source of the very large fortunes occa- 
sionally achieved by individuals in this branch of trade. For 
the rest I should conjecture that, where exceptional and ex- 
traordinary gains have been made, the end has been accomplish- 
ed, less through manufacturing operations properly so called, 
than through speculations carried on in the raw material of the 
industry. This, at least, we know, was notoriously the case 
with the large fortunes made during the continuance of the 
American civil war. 

§ 11. Turning now to the products of agricultural, pastoral, 
or, more generally, "extractive" industry, we find the circum- 
stances under which this class of goods is brought to market 
in all respects extremely different from those which we have 
just examined, and such as to permit a much wider margin 
of deviation for the market from the normal price. Here the 
period of production is longer, the result of the process much 
more uncertain, the commodity is at once more perishable and 
less portable, and human requirements in relation to it are 
mostly of a more urgent kind. The shortest period within 
which additions can be made to the supply of food and raw 
material of the vegetable kind is in general a year, and if 
the commodity be of animal origin, the minimum period is con- 
siderably longer. Again, the farmer may decide upon the 
breadth of ground to be devoted to a particular crop, or upon 
the number of cattle he will maintain, but the actual returns 



142 DERIVATIVE LAWS OF VALUE. 

will vary according to the season, and may prove far in excess 
or far in defect of bis calculations. These circumstances all 
present obstacles to the adjustment of supply to demand, and 
consequently tend to produce frequent and extensive devia- 
tions of the market from the normal price. Nor are the other 
conditions of the case such as to neutralize the influence of 
such disturbing agencies. The nature, indeed, of some of the 
principal agricultural products fits them sufficiently well for 
distant transport, and so far tends to correct fluctuations of 
price. But, on the other hand, the relation of these products 
to human wants is such as greatly to enhance that tendency to 
violent fluctuation incident to the conditions of their produc- 
tion. More especially is this the case with the commodity, 
whatever it may be, which forms the staple food of a people. 
For observe the peculiar nature of human requirements with 
reference to such a commodity. They are of this kind, that, 
given the number of a population, the quantity of the staple 
food required is nearly a fixed quantity, and this almost irre- 
spective of price: except among the very poorest, increased 
cheapness will not stimulate a larger consumption, while, on 
the other hand, all, at any cost within the range of their means, 
will obtain their usual supply. The consequence is, that, when 
even a moderate deficiency or excess occurs in the supply of 
the staple food of a people, in the one case the competition of 
consumers for their usual quantum of food rapidly forces up 
the price far out of proportion to the diminution in the supply; 
in the other, no one being inclined to increase his usual con- 
sumption, the competition of sellers, in their eagerness to find 
a market for the superfluous portion of the supply, is equally 
powerful to depress it. Those who have studied the history 
of English prices while England was yet under the regime of 
Protection, are aware of the enormous and sudden fluctuations 
which from time to time occurred under the influence of causes 
of this description. Such violent fluctuations will scarcely be 



FLUCTUATION IN STAPLE FOOD. 143 

witnessed again ; but even under the moderating regime of 
free trade, the peculiar character of the staple food in its re- 
lation to the requirements of human beings continues from 
time to time to make its influence felt, and to produce sudden 
and considerable changes in the quotations of the market. 
And here I may notice the converse of a phenomenon advert- 
ed to just now in connection with the market prices of the 
products of manufacture, I then pointed out that, while cir- 
cumstances, on the whole, contributed to steadiness of marhet 
value in such products, their normal values were in an especial 
degree liable to extensive changes. In the case of agricultural 
products, but more especially in the case of staple food, this re- 
lation is inverted. I ventured to assert, and in doing so I was 
supported by the authority of Adam Smith, that of all com- 
modities whatever, that which forms the staple food of a peo- 
ple is the commodity of which the normal value in the course 
of time undergoes the least variation. As I have already said, 
I believe we should find, if we went into the case, that during 
the course of some centuries the normal value of wheat (I do 
not say the normal ^?-fce) has altered very little in the more 
advanced countries of Europe. On the other hand, for the 
reasons which have been just set forth, wheat is, of all impor- 
tant commodities, that one which exhibits, in the movements 
of the market, variation in the most extreme degree. Inci- 
dents of this kind, it may be observed in passing, show the 
absolute necessity, if we desire to elucidate the phenomena of 
price, of distinguishing between market and normal values in 
economic discussion. The phenomena are perfectly distinct, 
and, as the foregoing examination has shown, sometimes fol- 
low, even in the instance of the same commodities, opposite 
laws. What likelihood, then, of getting a correct chart of 
their movements, if they are treated, as frequently happens in 
treatises on value, as one and the same manifestation, and con- 
founded together as the subject-matter of a single exposition? 



144 DERIVATIVE LAWS OF VALUE. 

§ 12. It will serve still further to elucidate the fluctuations 
of market price within the sphere of extractive industry if we 
regard its deviations from normal price under two aspects : 1, 
with reference to its intensity ; 2, with reference to its dura- 
tion, A commodity may rise very suddenly and greatly in 
price, but may quickly return to its usual terms of sale; or, 
on the other hand, rising slowly and not very greatly above 
its ordinary level, it may, nevertheless, continue for a long time 
at the elevation thus attained. If now, bearing this distinc- 
tion in mind, we compare among the raw products of industry 
those derived from the vegetable with those derived from the 
animal kingdom, I think we shall find the following rule in the 
main to hold true : namely, that vegetable products are for the 
most part subject to market fluctuations of the former charac- 
ter — the fluctuations, that is to say, are apt to be sudden and 
considerable, but comparatively short; while the market prices 
of commodities of animal origin rarely rise rapidly, but, when 
a sensible advance is established, commonly remain for a long 
time at the enhanced rate. Thus it has happened, even since 
the establishment of free trade, that the price of corn has, 
within the space of a few years, been halved and doubled 
again, and then in another year or two fallen once more to a 
medium level ;* but no such sharp oscillation has, so far as I 
am aware, occurred (at least in recent times) in the price of any 
animal product. Butcher's meat is perhaps, among animal 
products, that one which has lately exhibited the most marked 
advance. It would, however, be a mistake to assume that the 

* The weekly average price of wheat, for example, had risen in 1847 to as high 
a point as 102s. per quarter : within a year from that time it fell to little more 
than half that price, and in 1851 to as low as 43s. Within two years more, name- 
ly, about the commencement of the Crimean war — having in the interval oscillated 
slightly about the point of 45s. — it rose very suddenly to 73s. ; and in January, 1854, 
attained its maximum elevation of 84s., from which point it gradually declined. 
(See Tooke's " History of Prices," vol. v., part 1, § 14.) 



ANIMAL AND VEGETABLE PRODUCTS. 145 

great rise •which has occurred in this article within the last 
twenty years represents simply a market fluctuation, because 
there is reason to believe that, if not the cost of production in 
the strict sense of the term, at all events the cost of production 
as measured in money, has during this time very considerably 
risen. Unless, therefore, the value of gold were, by some ex- 
traordinary freak of economic nature, to recover what it has 
lost, there is not the smallest probability that the price of meat 
will ever return to the level at which it stood twenty years 
ago. The present advance, therefore, can not be considered, at 
all events for the chief portion of its amount, as a mere phe- 
nomenon of the market, but rather as a definitive rise of the 
normal price ; and it may be added that the same is, in a great- 
er or less degree, true of most instances of augmented price 
that have recently occurred. To return to the difference in the 
incidents of market price between vegetable and animal prod- 
ucts, its cause is mainly to be found in the conditions of their 
production. Commodities drawn from the vegetable kingdom 
can, in general, be multiplied more rapidly than those taken 
from the animal; and, therefore, deviations from the normal 
standard of price require for their correction, in this case, a 
shorter period of time. On the other hand, the same commod- 
ities are subject to much greater uncertainty in the process of 
production than those of animal origin, the agencies employed 
being here far less amenable to human control. Animals may, 
at least, be housed, and, hj other artificial expedients, sheltered 
from the violence of natural agencies, but few such means of 
mitigation can well be employed when the production of veg- 
etables on a large scale is the business in hand. Hence the 
defalcations of supply are usually more considerable in their 
case, and hence the oscillations of market price, though short- 
er, are also more intense. 

The most important exception to the rule just laid down oc- 
curs in the case offish and game, but it is an exception of that 

10 



146 DERIVATIVE LAWS OF VALUE. 

kind which proves the rule ; for, unlike animal products ob- 
tained bj domestication and breeding, the supply of fish, and 
in a less degree of game, is singularly at the mercy of causes 
uncontrollable by man, while the time requisite for catching 
them, as compared with the time required for the completion 
of ordinary industrial processes, is extremely short. The prin- 
ciple, therefore, on which the rule rests, would lead us to ex- 
pect here violent and brief fluctuations, more especially when 
we take into account, in connection with the conditions of their 
production, the extremely perishable nature of the articles in 
question — a circumstance which compels the dealers, at almost 
any sacrifice, to find a market for their goods within a strictly 
limited time. 



F_A.RT II. 

LABOR AND CAPITAL, 



FA^RT II. 

LABOR AND CAPITAL. 
CHAPTER I. 

THE RATE OF WAGES. 

§ 1. In discussing the laws of value, we have already par- 
tially solved the problems of wages and profits. For it has 
appeared that, where production assumes the character of a 
continuous operation, producers are in effect remunerated out 
of the values of their products, and that consequently wages 
and profits in each branch of production must stand, in the 
normal state of things and on the average, to wages and profits 
in every other branch, in the same relation as the values of 
the products from which they are derived. "Eelative wages 
and profits" thus follow the same laws which govern the ex- 
change value of commodities. In other words, our reasoning 
has involved this conclusion, that wages and profits, regarded 
as relative phenomena, are governed by Cost of Production, 
where the producers are in effective competition with one an- 
other, and, where they are not, by Reciprocal Demand. So 
fiir we were carried toward the solution of the wages and 
profits problem in the discussion of that of value; but it is 
important that we should not overrate the progress that has 
been effected. Let me repeat: what the doctrine of value re- 
veals to us on this subject is the causes which determine the 
relative remuneration of laborers as among themselves, and 
that of capitalists as among themselves. It tells us why some 



150 TEE BATE OF WAGES. 

classes of workmen and some classes of capitalists receive the 
same or equivalent remuneration, while in other cases in- 
equality in various degrees prevails; but it tells us nothing as 
to what determines the positive remuneration which any class 
of capitalists or of laborers receives, nor as to the causes on 
which depend the average well-being of all classes. In a 
word, we have ascertained what produces the ripples on the 
surface of the industrial stream ; but of the source from which 
the waters are derived, and of the depth and force of the cup 
rent, nothing has yet been disclosed. Why is the remunera- 
tion of industry, as a whole, such as we find it to be in the va- 
rious countries of the earth? Why is it maintained at one 
level in England, at another on the continent of Europe, at yet 
another in Asia, and at another still in the United States'? 
And why again is this level progressive in some countries, 
stationary in others, declining in a third class? These are 
questions on which the doctrine of value throws no light, and 
it is, therefore, to this side of the general problem that we have 
now to direct our attention. 

§ 2. I shall perhaps here be reminded that the question of 
the rate of wages, as well as that of the rate of profits, under 
whatever aspect we regard them, are, and can never be other 
than, problems of value; since they are simply questions of 
the value respectively of labor and abstinence; and that they 
should be dealt with in connection with that subject in the 
general theory of which they are implicated. I am certainly 
not going to dispute the allegation that wages and profits are, 
in a certain sense, phenomena of value. " Eate of wages" and 
"value of labor," "rate of profit" and "value of abstinence," 
are no doubt equivalent expressions; and for my part I see 
no objection to regarding the doctrines elucidating these phe- 
nomena as constituting branches of the same general theory 
with that which explains the value of commodities. But I 



A CASE OF EXCHANGE VALUE. 151 

apprehend the objection, embodied in the above remark, points 
to something more than this. What some students of Polit- 
ical Economy seem to desiderate is a comprehensive formula 
which shall embrace in a single solution, along with the laws 
of the exchange relations of commodities, those of the ex- 
change relations of labor and abstinence, and, along with these 
again, the laws of the exchange relations of land — that is to say, 
the theory of rent. Some such aim seems to have guided the 
speculations of Bastiat, whose work on the "Harmonies of 
Political Economy" is in effect an essay toward the determi- 
nation of the required formula; but the result of Bastiat's at- 
tempt is not encouraging to those who would essay the same 
path. He produces, indeed, generalizations which seem to sat- 
isfy the needed conditions ; but, closely examined, they either 
collapse into mere identical propositions, or are found to con- 
tain some Vagrant petitio pi'incipii. Where not open to either 
of these objections, they will be found to relate to the phe- 
nomena of comparative remuneration — that is to say, to that 
portion of the theory of wages and profits which I have ad- 
mitted and shown may be treated in connection with the gen- 
eral laws of value. 

The truth is, the fundamental facts of the two problems are 
too essentially discrepant to admit of this mode of treatment. 
Verbal generalizations are of course easy. For example, noth- 
ing is easier than to say that the value of labor (I put aside 
abstinence and profit as not included in my present inquiry), 
like the value of other things, depends npon supply and de- 
mand — we may find the formula in any newspaper we take 
up; but what light does this throw upon the causes which 
govern the values either of labor or of commodities? Simply 
none at all, or next to none at all. What we want to know is, 
not whether an increase of supply will cheapen a commodity 
or will cheapen labor, and an increase of demand raise the price 
of each — every coster-monger will tell you this much — but what 



152 THE BATE OF WAGES. 

it is which governs supply and demand in each case. Now, we 
can not take a step toward dealing with this question without 
beino- brought face to face with the fact that the motives which 
influence human beings in the production and supply of com- 
modities are not those which influence them in the production 
and supply of labor ; in other words, that the conditions oper- 
ative in the two cases are essentially distinct. If this is not 
already apparent to the reader, a brief consideration will suffice 
to make it so. 

First, then, the production of commodities is an onerous 
act, which will only be undertaken in the prospect of reward ; 
whence it follows that the supply of commodities will only 
be secured on the condition of this prospect presenting itself. 
On the other hand, the production of labor, which in other 
words is the production of human beings, is not an onerous 
act, but a consequence of complying with one of the strongest 
instincts of humanity — an instinct which, so far from needing 
the stimulus of reward, can only be kept under due control by 
powerful restraints. In the one case, action entails self-denial ; 
in the other, self-denial lies in abstaining from action. Pro- 
spective recompense indeed comes into requisition in both 
cases; but in the one it is needed to stimulate, in the other to 
control. Exclude the prospect of reward from productive in- 
dustry, and the supply of commodities will cease ; exclude the 
prospect of the reward which results from providence in re- 
producing human beings, and the supply of labor will run to 
excess. Nor shall we have need to modify seriously our con- 
?,lusion upon this point, if, passing from the primary act of 
reproducing human beings, we take account of what is neces- 
sary in order to fit them, once in existence, for an industrial 
career. They must be fed and clothed ; they must be brought 
np in a certain state of comfort ; and they must receive a cer- 
tain education — conditions which, unlike the act of origina* 
ting their existence, call for, in order to their fulfillment, con- 



LABOR AND COMMODITIES. 153 

tinuous and often arduous effort. Here, we must admit, there 
is an analogy between the preparation of a human being for 
industrial work, and the production of a commodity for the 
market; both processes involve cost. But there still remains 
this broad distinction, which effectually discriminates the two 
cases: The cost in the production of a commodity is under- 
gone deliberately, and with a distinct view to industrial ends: 
in the preparation of human beings for their career in life — I 
will not say that industrial ends have no place at all in the 
calculation, but I will assert this, that, except in the case of 
technical or professional education — a mere bagatelle in the 
general expense of rearing a laborer — industrial considerations 
are entirely subordinate to considerations of a wider and alto- 
gether different character. A man, whatever be his rank of 
life, brings up his children — I speak of the common case — as 
far as he is able, according to the ideas prevailing in that rank 
of life. He does so mainly because he feels certain obligations 
of morality and affection toward them, and because it would 
be shameful to do otherwise. His children once arrived at 
maturity, no doubt his views and theirs will take a direction 
more distinctly governed by industrial considerations, or at 
least considerations bearing upon material success in life; but 
at this point the supply of labor has been already determined. 
It is now in existence; and the industrial motive, now that it 
comes into play, operates, not upon the aggregate supply of 
labor, but merely upon the mode of its distribution. I do not" 
deny, indeed, that, in a certain irregular way, and taking con- 
siderable periods of time, the supply of labor as a whole fol- 
lows the demand for labor; but what I contend is, that it is 
not connected with demand by the same links which connect 
the supply of commodities with the demand for them. The 
adaptation of the supply of commodities to the demand is de- 
termined by strictly commercial motives: the adaptation of 
the supply of labor to the demand is not so determined. Hu- 



154 THE BATE OF WAGES. 

man beings, at least out of slave countries, are not produced 
to meet the requirements of the market, but for entirely differ- 
ent reasons. Now, this being so — the conditions determining 
the phenomena in the two cases being essentially distinct — 
what can come of forcing the solutions by dint of verbal re- 
finements into a single formula? Simply this: either our 
theory will be flagrantly untrue, or it will not go more than 
word-deep, and our show of explanation will merely serve to 
obscure the essential facts of the problem. 

§ 3. These preliminary points being disposed of, I turn now 
to the proper subject of this chapter — the causes determining 
the general or average rate of wages. But here an objection 
meets me on the threshold. Are we justified in speaking of a 
"general" rate of wages? Are the facts expressed by wages 
such as may be usefully embraced in a general conception and 
reasoned about as an aggregate ? A recent writer, Mr. Longe, 
has denied the existence of any facts which can warrant this 
expression : 

" The notion of all the laborers of a country constituting a body of 
general laborers capable of competing with each other, and whose 
"general" or "average" wage depends upon the ratio between their 
number and the aggregate wage-fund, is just as absurd as the notion of 
all the different goods existing in a country at any given time — for ex- 
ample, the ships, and the steam-engines, and the cloth, etc. — constituting 
the stock of general commodities, the general or average price of which 
is determined by the ratio between the supposed quantity of the whole 

aggregate stock and the total purchase-fund of the community 

How could the shocrmakers compete with the tailors, or the blacksmiths 
with the glass-blowers ? Or how should the capital which a master- 
shoe-maker saved by reducing the wages of his journeymen, get into the 
hands of the master-tailor ?"* 

To the latter questions I think I have already supplied a 

* " A Refutation of the "Wage-fund Theory of Modern Political Economy, "by 
F. D. Longe, pp. 55, 56. 



ME. LOXGE'S IDEA. 155 

sufficient answer; but with regard to the objection itself, and 
the illustration by which it is supported, the reader will ob- 
serve to what length it goes. The author of the passage just 
quoted is apparently unable to conceive a general or average 
rate where the average is not realized in each individual in- 
stance; otherwise where is the absurdity of speaking of a 
"general" or "average" price of commodities? If the no- 
tion of a general or average price of commodities is absurd, 
then what does the writer mean when he speaks of a rise or 
fall in the value of money? Or is that idea also beyond his 
conceptive power? A rise or fliU in the value of money is 
only another name for a fall or rise of general or average 
prices. The idea, in short, which Mr. Longe adduces as an 
extreme example of absurdity, is simply one of the most fa- 
miliar in the range of economic speculation. A general rate 
of wages is neither more nor less easy to conceive, neither 
more nor less absurd, than general prices. I think I know 
what I mean when I say that prices and wages in the United 
States, measured in greenbacks, have risen generally as com- 
pared with prices and wages, measured in gold ; that the aver- 
age rate is higher in the one case than in the other ; and I do 
not think I should be very wide of the mark if I attributed 
this difference to the different proportions in which purchasing 
power measured in gold, and purchasing power measured in 
greenbacks, stand related to commodities and labor. Yet 
these familiar notions are what Mr. Longe finds it impossible 
to conceive. 

An expression in the passage quoted would seem to imply 
that universal competition among laborers is an essential con- 
dition to the existence of an average rate of wages. Why it 
should be so (except on the supposition I have referred to, that 
an average rate requires that the average be realized in each 
particular instance) I am quite at a loss to imagine ; but Mr. 
Longe's language seems further to imply that, as a matter of 



156 THE BATE OF WAGES. 

fact, the several departments of industry in this and other 
countries are so practically isolated from each other, that wages 
in any of them may rise or fall without producing any effect 
beyond the particular department. I have already considered 
the extent to which competition is really effective in our in- 
dustrial life, and have endeavored to show in what way its ex- 
istence or non-existence affects relative wages. To what was 
then said I desire now to add that, even where competition 
among laborers is not effective, and where consequently wages 
are not in proportion to sacrifices, it is very far from being 
true that any such industrial isolation obtains as Mr. Longe's 
argument would suggest, A rise of wages, let us suppose, oc- 
curs in the coal trade : does any one suppose that this could 
continue without affecting wages, not merely in other rnining 
industries in full competition with coal-mining, but in indus- 
tries the most remote from coal-mining, industries alike higher 
and lower in the industrial scale? Most undoubtedly it could 
not ; and if any one questions the assertion, he may have his 
doubts resolved by what is now going on before our eyes. 
Nor is the explanation far to seek. Though laborers in cer- 
tain departments of industry are practically cut off from com- 
petition with laborers in other departments, the competition of 
capitalists, as I have already pointed out, is effective over the 
whole field. The communication between the different sec- 
tions of industrial life, which is not kept open by the move- 
ments of labor, is effectually maintained by the action of capi- 
tal constantly moving toward the more profitable employ- 
ments. In this way our entire industrial organization becomes 
a connected system, any change occurring in any part of which 
will extend itself to others and entail complementary changes. 
Not only, therefore, are we justified in generalizing the various 
facts of wages into a single conception, and in discussing "gen- 
eral" or "average" wages, but we have grounds for regarding 
this general or average rate as constituted of elements bound 



POSITION OF THE CONTROVERSY. 157 

together by a common connection, and forming parts of an 
integral whole. 

§ 4. The problem of the general rate of wages, after being 
the occasicA of perhaps more bitter controversy than any other 
within the tield of social inquiry, seemed some years ago to 
have received, so far as the essentials of the matter went, its 
definitive solution. The great stumbling-block to its accept- 
ance had long been the law of population, which, in spite of 
the overwhelming evidence adduced in its support by Mai thus, 
provoked, as all the world knows, a violent opposition, and led 
to a controversy which, extending over half a century, has 
only died out, if indeed it has died out, within a few years. 
This result may be attributed partly, we may perhaps assume, 
to the gradual progress of sound reason getting the better of 
the strongest prepossessions ; but it has of late been powerfully 
helped forward by the influence of Mr. Darwin's great work, 
in which the obnoxious principle — the tendency of human be- 
ings to increase faster than subsistence, which had been de- 
nounced as at once demoralizing to man and discreditable to 
the Author of the Universe — was shown to be merely a partic- 
ular instance of a law pervading all organic existence. How- 
ever this may be, in point of fact those attacks upon the eco- 
nomic doctrine of wages which were based upon objections to 
the Malthusian doctrines — attacks upon what we may call the "^^ 
supply side of the wages problem — have for some time come to 
an end. We may therefore assume that so much of the prob- 
lem has been solved to the general satisfaction of competent 
thinkers, and are consequently dispensed from entering on its 
consideration here. 

But the controversy has scarcely been closed on one side 
when it has been opened on another. The law of the supply 
of labor is no longer called in question ; but several able 
writers have within a few years, in dissertations directed 



158 THE BATE OF WAGES. 

against what is known as the "Wages-fund" doctrine, chal- 
lenged the view hitherto received as to the law of its demand. 
Foremost among these has been Mr. Thornton, who, in his 
book on "Labor,"* has made the Wages-fund doctrine the ob- 
ject of a special and elaborate attack ; nor is it possible to deny 
the ability and skill with which the assault has been conducted, 
when we find that he can boast, as among the first-fruits of 
his argument, no less a result than the conversion of Mr. Mill. 
Such a'n event, it must be frankly conceded, affords an ex- 
tremely strong presumption in favor of the soundness of Mr. 
Thornton's view. Mr. Mill had himself been, if not the origi- 
nator of the Wages-fund doctrine, certainly its most able and 
effective expositor; and this doctrine, supported by his argu- 
ment, and implicated in his general theory, he has been led b}^ 
Mr. Thornton's reasoning to discard. I say, it can not be de- 
nied that such a circumstance constitutes a weighty presump- 
tion in favor of Mr. Thornton's view ; but I must also contend 
that it amounts to no more than a presumption. In the free' 
dom of science, I claim for myself the right of examining the 
doctrine on its merits. I must own myself unconvinced by 
Mr. Thornton's reasonings, strengthened and enforced though 
these have been by the powerful comments of Mr. Mill.f Not 
indeed that I am prepared to defend all that has been written 
on what, for convenience, I may call the orthodox side of this 
question, but I believe the view maintained by those who have 
written on that side, and pre-eminently the view maintained 
by Mr. Mill himself — taking it as set forth in his original work, 
not as explained in his retractation — to be substantially sound, 
though needing, as it seems to me, at once fuller development 
and more accurate determination than it has yet received. 



* " On Labor : its Wrongful Claims and Eightful Dues,"etc,, by W. T. Thora- 
ton. Second Edition, 1870. 

t See Fortnightly Review for May 1, 1869. 



THE WAGES-FUND THEOEY. 159 

§ 5. I can not, I think, better open the examination which I 
propose to make of this subject, than by quoting the following 
statement from Mr. Mill's "Principles of Political Econom}^," 
of the nature of the Wages-fund, and its place in the industrial 
economy : 

" Wages, then, depend mainly upon the demand and supply of labor ; 
or, as it is often expressed, on the proportion between population and 
capital. By population is here meant the number only of tlie laboring 
class, or rather of those who work for hire ; and by capital, only circu- 
lating capital, and not even the whole of that, but the part which is ex- 
pended in the direct purchase of labor. To this, however, must be add- 
ed all funds which, without forming a part of capital, are paid in ex- 
change for labor, such as the wages of soldiers, domestic servants, and 
all other unj)roductive laborers. There is unfortunately no mode of ex- 
pressing by one familiar term the aggregate of what may be called the 
Wages-fund of a country : and as the wages of productive labor form 
nearly the whole of that fund, it is usual to overlook the smaller and 
less important part, and to say that wages depend on poijulation and 
capital. It will be convenient to employ this expression, remembering, 
however, to consider it as elliptical, and not as a literal statement of the 
entire truth."* 

As I understand this passage, it embraces the following 
statements: 1st, " Wages-fund" is a general term, used in the 
absence of any other more familiar, to express the aggregate 
of all wages at any given time in possession of the laboring 
population ; 2d, on the proportion of this fund to the number 
of the laboring population depends at any given time the av- 
erage rate of wages; 3d, the amount of the fund is determined 
by the amount of the general wealth which is applied to the 
direct purchase of labor, whether with a view to productive or 
to unproductive employment. If the reader will carefully con- 
sider these several propositions, I think he will perceive that 
they do not contain matter which can be properly regarded as 

* "Principles of Political Economy," book ii., chap. xi. 



160 THE BATE OF WAGES. 

open to dispute. The first is little more than a definition ; at 
most, it assumes that that exists in the aggregate which is ad- 
mitted to exist in detail. The second merely amoants to say- 
ing that the quotient will be such as the dividend and divisor 
determine. The third equally contains an indisputable' asser- 
tion ; since, whatever be the remote causes on which the wages 
of hired labor depend (and the question at present is exclusive- 
ly of hired labor) the proximate act determining their aggregate 
amount must in all cases he a direct purchase of its services. In 
truth, the demand for labor, thus understood, as measured by 
the amount of wealth applied to the direct purchase of labor, 
might more correctly be said to be, than to determine, the 
Wages-fund. It is the Wages-fund in its inchoate stage, dif- 
fering from it only as wealth just about to pass into the hands 
of laborers differs from the same wealth when it has got into 
their hands. Our analysis thus leads us to the result, that the 
passage quoted from Mr. Mill can not be taken to contain con- 
troversial matter. JDhe statements are such as may not be dis- 
puted, once their meaning is clearly understood. At the same 
time it must be freely confessed that it contains no solution of 
the wages problem: it is not a solution, but a statement of 
that problem — a statement, as it seems to me, at once clear, 
comprehensive, and succinct, presenting in clear light the two 
factors which constitute the phenomenon — the Wages-fund re- 
sulting from the direct demand for labor, and the laboring 
population forming the supply. The solution will consist in 
connecting these factors with those principles of human nature 
and facts of the external world which form the premises of 
economic science.* 

* "The political economy of the wages question," says Mr. Brassey (p. 251), 
"is simple enough." Certainly it is, if it consists in showing that every rise or 
fall of wages is traceable to a change in the relation of supply and demand. But 
it seems to me that Mr. Brassey has mistaken the statement of the problem for its 
solution. It needs no proof surely to see that if £40,000,000 be added to the ex- 



THE WAGES-FUND THEORY. 161 

§ 6. As I have already observed, it is with a portion only 
of this problem that we have need now to concern ourselves. 
The causes governing the supply of labor may be taken as 
sufficiently elucidated. Our business is with the causes gov- 
erning the demand — governing the amount of wealth applied 
to the direct purchase of labor, or, as we may equally well ex- 
press it, governing the Wages-fund. 

It is here for the first time that room for controversy really 
occurs ; and though the issue has not always been taken with 
precision, it is in effect on the point just indicated that the re- 
cent controversy turns. By the upholders of the Wages-fund 
doctrine the view taken is, that the amount of a nation's wealth 
expended in wages at any given time stands — the character of 
the national industries and the methods of production employ- 
ed being given — in a definite relation to its general capital, 
while the amount of its general capital is determined by cer- 
tain economic conditions resulting from the character of the 
people and the nature of their environment* The Wages- 
fund, therefore, according to this view, depends, the conditions 
of production being given, proximately on the amount of a 
nation's capita), and ultimately on those more remote causes 
which control the growth of this fund. It is against this view 

isting capital of a country, and the greater portion applied to the direct purchase 
of labor (the supply of labor and other things continuing the same), wages must 
rise ; or that the withdrawal of a great sum from the payment of wages, as on the 
occasion of a commercial collapse, must on the other hand, cceteris paribus, in- 
volve a fall of wages. To tell us this is not to solve the wages question, but to 
state it. What we want to know is what determines the relation of supply and 
demand — of the Wages-fund to the laboring population. Why is that relation 
such as to yield one rate of wages in the United States, another rate in Great 
Britain, and a third rate on the continent of Europe? If Mr. Brassey would 
fairly address himself to this problem, I think he would find that the political 
economy of the wages question is not quite so " simple " as he supposes. 

* As set forth, for example, in Mill's "Principles of Political Economy," 

book i., chap. xi. 

11 



162 THE BATE OF WAGEH. 

of the connection of facts that the opponents of the impugned 
doctrine have directed their arguments. According to Mr. 
Thornton there is no portion of a nation's wealth " determined " 
toward the payment of wages. The amount which actually 
reaches the laborer is, I presume he would say, the result of 
circumstances (which, as not being " determined," must be re- 
garded as accidental) of which the most important are those in- 
cidents in the position respectively of employer and employed 
which favor or restrict the capacity for bargaining. And sub- 
stantially the same language is held by Mr. Longe. Eather in- 
consistently, however, while denying the determination of any 
portion of the general wealth to the payment of wages, Mr. 
Longe propounds a theory to explain the fact of this deter- 
mination. The determining cause, he says, is not, as alleged 
in the Wages-fund theory, the economic conditions affecting 
the growth of capital, but "the demand for commodities." 
f " The demand for commodities certainly does not directly de- 
termine the quantity of labor or number of laborers in a coun- 
try, nor the quantity of corn or other things available for the 
maintenance of laborers, but it does determine the quantity of 
labor employed, and the quantity of wealth spent in the wages 
of laborers " (p. 46). As he elsewhere puts it, "the demand 
for commodities which can only be got by labor is as much 
a demand for labor as a demand for beef is a demand for 
bullocks." 

§ 7. Such are the positions taken in this controversy by the 
disputants on either side. In proceeding to state the doctrine 
in question, with a view to meet the objections which have 
been advanced against it, it will be convenient in the first place 
to examine the theory put forward by Mr. Longe, and which 
apparently finds favor with Mr. Thornton also, as to the bear- 
ing of the demand for commodities upon the remuneration of 
labor; I shall then set forth the grounds on which the doctnne 



THE DEMAND FOB COMMODITIES. 163 

of the Wages-fund rests; and having done this, I shall be in a 
position to consider the arguments advanced by Mr. Thornton 
against the existence of any "determining" causes in the case. 

Mr. Lonare has refused to admit the existence of, and has 
thrown doubt upon the possibility of conceiving, " a general 
rate of wages." He, however, allows, at least by implication, 
that we may conceive an aggregate quantity of wealth as spent 
in wages, or what I call a Wages-fund ; for in the passage just 
quoted he tells us the cause which determines the amount of 
this fund. It is, he says, "the demand for commodities." I 
need scarcely remark that the view here expressed is not pe- 
culiar to Mr. Longe. It is in truth about the most popular of 
all popular fallacies. From this root has sprung a whole clus- 
ter of maxims, such as that " the extravagance of the rich is 
the gain of the poor," that " profusion and waste are for the 
good of trade," and others of like import which have in their 
time done much to perplex and demoralize mankind, and are 
still far from being extinct. That there is much plausibility 
in the view here taken of the economy of industry can not in- 
deed be denied, since otherwise how should it have obtained 
the almost universal vogue which it enjoys? It will therefore 
be worth while to sift with some care the grounds of an opin- 
ion which has certainly exercised no small amount of evil in- 
fluence on modes of thinking and acting in economic affairs. 

To state in its strongest form the argument for the view 
which I am combating : What, it may be asked, is the primary 
consideration that weighs with a capitalist in investing his 
wealth ? Is it not the prospect of finding a sale for his prod- 
ucts — in other words, the demand for commodities? And, as 
this is that which first moves him to action, is it not also that 
which governs the proportions of his operations after he has en- 
tered upon action ? Increase the demand for his commodities, 
and he will increase the amount of his investment ; diminish 
the demand, and he will diminish the investment. But, othei 



164 THE BATE OF WAGES. 

things being the same, the greater the investment, the greater 
will be the amount of his wealth spent in the wages of labor. 
In proportion, therefore, as the demand for his commodity is 
large, his expenditure in wages will be large. This is true of 
every capitalist and of every branch of production. From 
which the conclusion seems to follow that the quantity of 
wealth spent in the wages of labor — i e., the aggregate Wages- 
fund — is determined by the demand for commodities. 

It seems to follow, but it does not follow ; for, looking close- 
ly into the above reasoning, we find that while the conclusion 
is an assertion as to quantity, the premises relate to propor- 
tion. The existence of a demand, for example, for houses 
in a given degree of intensity will cause a certain quantity of 
the national capital to be directed to the building of houses; 
but it will not and can not determine what that quantity shall 
be. This will depend, in the first place, upon the amount of 
the total capital available for investment ; and secondly, on the 
relative force of the demand for houses as compared with the 
demand for other things. What the demand for houses and 
for other things determines is merely the proportions in which 
the available capital of a country shall be distributed over the 
field of production. Those proportions will adapt themselves 
to the proportions of the various demands for commodities. 
Increase the demand for a given commodity, and, other things 
being the same, a larger proportion of the available capital will 
be directed toward its production ; diminish the demand for it, 
and a contrary result will ensue : but neither in the one case 
nor in the other will the demand for the commodity determine 
how much capital shall be devoted to its production ; nor for 
similar reasons will the demand for commodities in general 
determine a like result with regard to them. It is as if we ar- 
gued, that because a man distributes his income in the propor- 
tion of his various needs, spending more on those articles to 
purchase which a larger sum is wanted to satisfy his require- 



THE DEMAND FOB COMMODITIES. 165 

merits, therefore, the greater his needs the larger must be his 
income. Large or small, his income will be distributed in pro- 
portion to his needs ; and, large or small, the Wages-fund will 
be distributed over the various industrial occupations in the 
proportions indicated by the demand for commodities. But 
this tells us nothing as to what determines either the amount 
of a man's income, or the amount of the Wages-fund. We are 
thus brought to Mr. Mill's conclusion, that the demand for com- 
modities determines the direction of investment and production, 
but not the more or less of what the laborer on an average re- 
ceives. 

But it may be well perhaps to give the argument a more 
practical direction ; and for this purpose I will ask the reader 
to consider some of the consequences which would follow from 
this theory of which Mr. Longe has made himself the expos- 
itor, in connection with the condition of labor in different 
countries. Supposing it to be true that the amount of wealth 
spent in the wages of labor is determined by the demand for 
commodities, then it will follow that, given the demand for 
commodities, we are given the amount of wealth spent in the 
wages of labor. The latter will vary with the former, and the 
Wages-fund will, on this view, bear a constant proportion to 
the aggregate demand for commodities. Now, as has been ex- 
plained in a former chapter of this work,* the aggregate de- 
mand for commodities depends on the aggregate production 
of commodities. Speaking broadly, all commodities produced 
under a regime of division of labor are produced in order to be 
exchanged. The more each man produces, the more he will 
have to sell, and the more he will be able to buy. It results, 
therefore, from the theory we are considering, that the aggre- 
gate wealth appropriated to the use of the laboring population 
must always bear a constant proportion to the gross produce 

* See ante, pp. 23-26. 



166 THE RATE OF WAGES. 

of the community. Now, how does this accord with the facts 
of wages as presented, let us say, in England and in the United 
States ? According to computations made by Mr. Wells,* the 
United States Commissioner, taken in connection with some 
made by Mr. Dudley Baxter for this country, it would seem 
that the annual gross produce of the United States per head 
of the population bears to the annual gross produce of the 
United Kingdom per head of the population the proportion of 
$140 to $134. The United Kingdom includes Ireland, which 
can not but sensibly reduce the average for this country. 
Omitting Ireland, the annual per capita produce of Great Brit- 
ain and of the United States would, therefore, according to 
these computations, be as nearly as possible the same. But 
the annual gross produce would determine the demand for 
commodities, and the demand for commodities, according to 
Mr. Longe, determines the quantity of wealth spent in the 
wages of labor. From which several positions the conclusion 
follows that the Wages-fund of Great Britain stands to that of 
the United States in the same proportion as the population of 
the former country to the population of the latter. Now, tak- 
ing this to be so, and assuming further that the proportion of 
the population working for hire is the same in both countries, 
then the average rate of wages would for both countries be the 
same. In point of fact, the working population constitutes a 
smaller fraction of the entire population in Great Britain than 
in the United States : it would, therefore, according to this 
view, bear a less proportion to the Wages -fund here than 
there. In other words, we are led by " the demand for com- 
modities " theory, applied to the results ascertained by English 
and American statisticians, to this singular conclusion, that the 
rate of wages in Great Britain should be on an average higher 
,than in the United States ! 

I have taken for comparison Great Britain and the United 

* Wells's Report, 1869, p. 13. 



THE DEMAND FOR COMMODITIES. 167 

States, because the requisite data were here easily obtainable ; 
but any one who has followed the foregoing argument will 
perceive that, had the comparison been made between Great 
Britain and some still more recently settled country — for ex- 
ample, some of the Western States of North America, or one 
of our own Australian colonies — the reductio ad absurdum 
would have been yet more glaring. In effect, statistical de- 
tails in such a comparison are superfluous. The broad facts 
of the case are such as can not be missed. It is evident at a 1 
glance that in such countries as our Australian colonies, or as 
Illinois or California, the amount of the entire annual produc- 
tion appropriated to the laboring population bears a far larger 
proportion to the whole than in old countries like Great Brit- 
ain or France ; that is to say, the Wages- fund in those parts 
of the world bears a larger proportion to the demand for com- 
modities than in Western Europe. The demand for commod- 
ities, therefore, does not determine the Wages-fand. Obser- 
vation, moreover, of the course of industrial development in 
such countries exhibits this fact, that, while with the progress 
of society the amount of wealth which goes to support hired 
labor pretty constantly increases, the proportion which this 
bears to the total produce of industry nearly as constantly de- 
clines — growing smaller as the realization of fortunes enables 
a larger proportion of the people to retire from active work, 
and as capital assumes more extensively a fixed form. In a 
word, the most prominent features in the industrial economy 
of new, old, and advancing countries absolutely precludes the 
supposition that the demand for commodities has any such 
connection with the interests of the laboring population as the 
doctrine I am now considering assumes. 

§ 8. So far as to Mr. Longe's theory of Wages. I proceed 
now to state the doctrine of the Wages-fund, as at least I my- 
self understand it. 



168 THE BATE OF WAGES. 

It will be remembered that in the enunciation which I quoted 
from Mr, Mill of the wages problem, the Wages-fund is stated 
to consist of two distinct parts — one, the largest and by much 
the most important, constituting a portion of the general cap- 
ital of the country ; while the other is derived from that part 
of the nation's wealth which goes to support unproductive la- 
bor, of which Mr. Mill gives as an example the wages of sol- 
diers and domestic servants. In proceeding to deal with the 
wages question, it will be convenient to omit for a time all 
consideration of the latter part : this will be more easily dealt 
with when we have ascertained the causes which govern the 
main phenomenon. 

Eestricting our view then for the present to that portion of 
the general Wages-fund which goes to support productive la- 
bor, we have, in the first place, to observe that the hiring of 
labor for productive purposes is an incident of the investment 
of capital. A capitalist engages and pays a workman from 
precisely the same motives which lead him to purchase raw 
materia], a factory, or a machine. In searching, therefore, for 
the causes which govern the amount of wealth spent in the 
hiring of labor, we must advert to the considerations which 
weigh with men in devoting their means to productive invest- 
ment. Why, for example, does A. B. employ his wealth in 
productive operations? And why does he employ so much 
and no more in productive operations ? An adequate answer 
to these questions will carry us some way toward the goal we 
have in view. 

It seems to me that the proper answer is as follows : A. B. 
invests his wealth productively in order to obtain a profit on 
the portion of his means so employed ; and he invests so much 
and no more, because, his total means being what they are, and 
regard being had on the one hand to his private requirements 
and taste for indulgence, on the other to his desire to augment 
his means, coupled with the opportunities afforded him of do- 



CAUSES OF INVESTMENT. 169 

ing so by making profit, this is the amount which it is suit- 
able to bis disposition, in the circumstances in which he is 
placed, so to invest. In other words, we find the amount of 
A. B.'s investment determined by the following circumstances: 
First, the amount of his total means ; secondly, his character 
and disposition as affected by the temptation to immediate en- 
joyment on the one hand, and by the prospect of future ag- 
grandizement on the other; thirdly, the opportunities of mak- 
ing profit. Alter any of these conditions — his total means, his 
character, or his opportunities of making profit, and the effect 
will be an alteration in the amount of his investment. Increase 
his means, and, other things being the same, he will invest more 
largely : again, increase the prospect of profit, and, other things 
being the same, he will invest more largely : lastly, increase the 
strength of the accumulative principle in his character in rela- 
tion to the taste for immediate enjoyment, and once more, other 
things being the same, he will invest more largely : on the other 
hand, a change in any of these conditions in the opposite direc- 
tion would lead to his investment being correspondingly con- 
tracted. 

Applying these considerations to the case of a community, 
it seems to me that we are justified in laying down the follow- 
ing proposition : That, the amount of wealth in a country be- 
ing given, the proportion of this wealth which shall be invest- 
ed in industrial operations with a view to profit will depend, 
first, upon the strength of those qualities in the average char- 
acter of its inhabitants which lead to productive investment — 
what Mr. Mill calls " the effective desire of accumulation ;" and 
secondly, on the opportunities of industrial investment open to 
the community offering a rate of profit sufficient to call this 
principle into activity — in a word, on " the extent of the field 
for investment." 

Such being the conditions determining the investment of 
capital, it is plain that, if all capital consisted in wages, or if 



170 THE BATE OF WAGES. 

wages bore always the same proportion to a given quantity of 
capital, the problem with which we are immediately concerned 
would here be solved ; and we might refer the phenomenon in 
question — we may describe it as w^e please, the extent of the 
demand for labor or the amount of the Wages-fund — simply 
and directly to the conditions which have just been stated, viz., 
in a given state of the national wealth, to the strength of the 
effective desire for accumulation, taken in connection with the 
extent of the field for investment. In point of fact, however, 
wages constitute but a portion of capital, and, what greatly 
complicates the inquiry, this portion bears no constant relation 
to the aggregate amount. It therefore still remains for us to 
determine the circumstances on which depends the distribution 
of capital between wages and the other elements of which cap- 
ital consists. 

Those other elements may be summed up under the heads 
of " Fixed Capital " and " Eaw Material." Fixed Capital, Raw 
Material, and Wages-fund, therefore, form the three constitu- 
ents of Capital, and the problem to be solved is. What are the 
causes which, in a given field of industry, determine the pro- 
portion in which these three constituents combine? 

Let us again suppose an individual A. B. contemplating in- 
vestment ; he has decided how much of his whole means he 
intends to employ in productive operations, but, this point hav- 
ing been settled, he has yet to consider in what proportions the 
amount shall be divided between Fixed Capital, Eaw Materi- 
al, and Wages. What is to prescribe the respective quotas ? 
Manifestly, in the first place, the nature of the industry in 
which he proposes to embark his capital. Suppose, for exam- 
ple, his purpose is to engage in cotton or woolen manufacture, a 
very large proportion of his whole capital will assume the form 
of buildings, machinery, and raw wool or cotton ; that is to 
say, of fixed capital and raw material, which would leave a 
correspondingly small proportion available for the payment of 



ELEMENTS OF CAPITAL. 171 

wages. On the other hand, if, with the same capital to invest, 
he had selected agriculture as the field for its employment, the 
bulk of his capital would take the form of wages, and fixed 
capital and raw material would assume a relatively unimpor- 
tant place in his outlay. It is thus evident that the nature of 
the industry selected for investment must go a long way in de- 
termining the proportions in which the capital shall be distrib- 
uted among the several instruments of production, and, there- 
fore, must go a long way in determining the proportion which 
the wages element in that particular capital shall bear to its 
whole amount. Now the considerations which weigh with an 
individual capitalist are those which weigh with a community 
of capitalists ; and we are therefore justified in concluding that 
the main circumstance governing the proportion which the 
Wages-fund shall bear to the general capital of a nation is the 
nature of the national industries. 

We are justified in concluding that this is the main circum- 
stance ; but a close examination will show that other circum- 
stances also enter into the conditions which determine the final 
result. What the nature of the national industries really de- 
termines is the proportion in which labor shall be combined 
with the other instruments of production — fixed capital and 
raw material — in the general industry of a country ; but what 
we want to know is the place which ivages shall hold in this 
combination. Now the consideration of a simple example will 
show that, the proportion of labor to the other instruments of 
production being given, the proportion which wages shall bear 
to the total capital may vary. 

Let us suppose a capitalist starting with £10,000. He finds 
that with £5000 he can buy fixed capital and raw material 
which will give full employment to 100 competent workmen ; 
and if we suppose the rate of wages for these workmen to aver- 
age £50 a year, the payment of their wages at this rate would 
absorb the rest of his capital, viz., £5000. His entire capital 



172 THE BATE OF WAGES. 

would thus be divided into £5000 for fixed capital and raw 
material, and £5000 for wages. But now suppose the current 
rate of wages for such labor as he required to have been £40 
instead of £50 a year, he would have been able to procure the 
100 workmen which his fixed capital and raw material re- 
quired for £4000 : £5000 having as before been invested in 
fixed capital and raw material, he would thus find himself with 
£1000 of capital still disposable. This we may suppose he 
would invest in the same business, and it would accordingly 
be necessary to bring together the instruments of production 
purchasable for £1000 in the same proportions as before — that 
is to say, he would have to distribute the £1000 nearly as fol- 
lows : Fixed capital and raw material (let us say for the sake 
of round numbers) £550 ; wages £450. His whole capital will 
now be divided thus; 

Fixed capital and raw material £5,550 

Wages (110 men at £40) 4,450 

Total capital £10,000 

The proportion between labor, fixed capital, and raw ma- 
terial would here be the same as before, but whereas in the 
first case the Wages-fund represented 50 per cent, of his whole 
capital, it now represents but 44 per cent. It is of course evi- 
dent that, had I made the opposite supposition, and taken the 
current rate of wages at £60 instead of £40, it would have 
been necessary, in order to maintain the due proportion be- 
tween labor and the other productive instruments, that the 
wages element should have been increased at the expense of 
fixed capital and raw material. The distribution of the total 
capital would then have stood nearly thus : 

Fixed capital and raw material £4,550 

Wages of 90 men at £60 (nearly) 5,450 

Total capital £10,000 



ELEMENTS OF CAPITAL. 173 

In other words, the Wages-fund would now constitute 54 per 
cent, of the total investment. 

These examples show that the nature of the national indus- 
tries do not determine absolutely the distribution of the na- 
tional capital among the three leading instruments of produc- 
tion, but that the result is liable to be modified by the rate of 
wages which happens to be current. Now, so far as this is the 
case, it will perhaps strike the reader that our reasoning has 
conducted us into a vicious circle, inasmuch as, while seeking 
a solution of the rate of wages in the causes determining the 
Wages-fund, we have been suddenly confronted with the phe- 
nomenon itself as one of those causes. A little reflection, how- 
ever, will show that the circle is apparent merely, and that the 
grounds of our argument are really independent and distinct. 
For, whatever be the causes which determine the Wages-fund, 
the amount of that fund being so determined, the rate of wages 
is merely the industrial outcome, and I might even say, the 
concrete expression, of the supply of labor. The modifying 
circumstance, therefore, in the case, though indicated by the 
rate of wages, is really the supply of labor; and our analysis 
accordingly issues in the following conditions as the determin- 
ing causes of the Wages-fund, viz. : the total capital of the 
country (determined in the manner already explained); the 
nature of the national industries ; and the supply of labor — 
facts at once distinct, and entirely independent of the subject 
of our investigation. 

It would seem, then, that the amount of the Wages-fund 
(which the reader will be careful to distinguish from the rats 
of wages) is to some extent affected by the number of compe- 
tent laborers offering their services, wherever those laborers 
are employed in conjunction with fixed capital and raw ma- 
terial. Now it may be worth while to point out the manner 
in which this influence is exerted. Reverting to our previous 
illustrations, it appears that, other things being the same, a rise 



174 THE BATE OF WAGES. 

in the current rate of wages issues in an expansion of the 
Wages-fund, and, contrariwise, a fall in the current rate in its 
contraction. But, the rate of wages, other things being the 
r same, varying inversely with the supply of labor, this is equiva- 
lent to saying that the "Wages-fund expands as the supply of 
labor contracts, and contracts as the supply of labor expands. 
An unexpected consequence, not, so far as I know, before ad- 
verted to, results from this play of economic forces, namely, 
that an increase or diminution in the supply of labor, where it 
is of a kind to be employed in conjunction with fixed capital 
and raw material, acts upon the rate of wages with a force 
more than proportional to the increase or diminution in the sup- 
ply ; for it tells at the same time upon both the factors on 
which the result depends, modifying them in opposite direc- 
tions — the fund undergoing diminution as the number of those 
who are to share it is increased ; or, on the other hand, ex- 
panding as the sharers become fewer. This occurs, I say, 
where labor is of a kind to be employed in conjunction with 
fixed capital and raw material ; and, it may be added, that the 
effect would only assume sensible dimensions where those 
agencies constituted a substantial proportion of the whole capi- 
tal invested. Indeed it would be a mistake to regard this par- 
ticular condition — the supply of labor considered as a cause 
affecting, not the rate of wages, but the aggregate Wages-fund 
— as under any circumstances more than a subordinate and 
modifying influence in the case. The point is one of theoretic 
rather than of practical importance ; and, in considering the 
variations of the Wages-fund, it will rarely be necessary to take 
account of more than the two main determining conditions of 
that phenomenon — the growth or decline of capital, and the 
nature of the prevailing industries. 

§ 9. It appears, then, that the aggregate amount of wealth 
appropriated to the laboring population in any country varies. 



GROWTH OF THE WAGES-FUND. 175 

not simply with the progress of the national wealth, nor yet 
with the progress of the national capital, but with this latter 
circumstance taken in connection with the character of the na- 
tional industries, the result being also, within certain narrow 
limits, modified by the supply of labor. In other words, it ap- 
pears that the same amount of capital will yield under different 
circumstances Wages-funds of different dimensions, and will 
consequently be capable of supporting populations of different 
magnitudes. This position finds its illustration and verification 
in the industrial phenomena of different countries. For ex- 
ample, it is obvious at a glance that a given amount of capital 
invested in the Western States of North America supports a 
larger laboring population than the same amount invested in 
the New England States ; and the reason is plain : the former 
States are more extensively agricultural than the latter, and 
consequently employ fixed capital and raw material less ex- 
tensively in their staple industries; it follows of course that 
the proportion of the total investment applicable to the pay- 
ment of wages is correspondingly greater in those States. 
Again, a comparison of an average investment in the United 
States — it matters not in what part of them — and in Great 
Britain would reveal analogous differences. Fixed capital be- 
ing more largely employed in the industries of Great Britain, a 
given amount of capital invested in those industries would 
yield a smaller Wages-fund than the same capital invested in 
the United States, and consequently would support — allowance 
made for the different rates of wages in the two countries — a 
smaller laboring population. Similarly, if, instead of compar- 
ing different countries, the comparison were made between dif- 
ferent epochs, we should still find the power of capital to sup- 
port labor varying with the changes in the character of the in- 
dustries in which it is employed. And, in connection with 
this, we may notice what amounts to an economic derivative 
law in the industrial development of progressive communities. 



176 THE BATE OF WAGES. 

The modifications wliicli occur in the distribution of capital 
among its several departments as . nations advance are by no 
means fortuitous, but follow on the whole a well-defined course, 
and move toward a determined goal. In effect, what we find 
is, a constant growth of the national capital, accompanied with 
a nearly equally constant decline in the proportion of this cap- 
ital which goes to support productive labor. This is the inev- 
itable consequence of the progress of the industrial arts, the 
effect of which is to cause a steady substitution of the agencies 
of inanimate nature for the labor of man. In making this 
remark it is perhaps superfluous to add that it is not to be 
inferred from the circumstance stated that the progress of 
those arts is unfavorable to the interests of labor. Even on 
the lowest and most materialistic view of the interests of la- 
bor the reverse is the fact; for what industrial progress under 
the influence of the advancing arts and sciences effects is a 
diminution, not in the absolute amount of the Wages-fund, but 
only in the proportion which it bears to the total capital of a 
country — a diminution which is perfectly compatible with a 
steadily progressive increase of the fund. One has only in- 
deed to consider what the Wages-fund of such a country as 
Great Britain has grown to under a regime of advancing indus- 
trial art, and reflect on what it would probably now have been 
had that progress been arrested a century ago, to perceive the 
utter groundlessness of the notion that industrial art can, in the 
long run, be antagonistic to labor. Not the less, however, is it 
indispensable, if we would understand the most salient facts of 
modern industrial life, to keep constantly in view the tendencyt 
of the Wages-fund, with the progress of wealth and art, to lag 
behind the advances of the other factors of the national capi- 
tal.* The fact is one of very great significance, and highly de- 

* These remarks receive a practical illustration from the important and suggest- 
ive article by Professor Fawcett in the Fortnightly Review (January, 1874), in 



SOCIAL CONSEQUENCES. 177 

serving the consideration of those who speculate on social sub- 
jects. For it involves this double consequence bearing on the 
laws of social growth — a tendency toward a relative increase 
of the classes not living by hired labor as compared with those 
who do ; and again, a tendency toward increased inequality in 
the distribution of wealth.* I say it involves these conse- 
quences as tendencies ; and I may add, that up to the present 
time those tendencies have in general been very fully realized in 
the actual experience of the world, and in an eminent degree 
in the experience of Great Britain. They exist, however, as 
tendencies only, and may, like other tendencies or laws of na- 
ture, be counteracted through the influence of tendencies of an 
opposite kind; in a word, the balance may be redressed by 
suitable expedients. Though the fund for the remuneration 
of mere labor, whether skilled or unskilled, must, so long as 
industry is progressive, ever bear a constantly diminishing pro- 
portion alike to the growing wealth and growing capital, there 
is nothing in the nature of things which restricts the laboring 
population to this fund for their support. In return, indeed, 
for their mere labor, it is to this that they must look for their 
sole reward ; but they may help production otherwise than by 
their labor : they may save, and thus become themselves the 
owners of capital, and profits may thus be brought to aid the 

which he calls attention to the slight increase which has occuiTed in the rate of 
wages in Great Britain contemporaneously with the large additions recently made 
to our national wealth. 

* This latter result can not indeed be said to be necessary ; since it is conceivable 
that laborers by limiting their numbers might keep the rate of their remuneration on 
a level with the growing incomes of other classes. To do this, however, two con- 
ditions would have to be fulfilled : the productiveness of industry would have to 
increase in a degree suflScient to permit of this high rate of remuneration consist- 
ently with yielding also a rate of profit high enough to attract capital toward in- 
vestment ; and secondly, the result would imply such a degree of self-control on 
the part of the laboring population as, I fear, experience gives us no warrant for 
expecting. 

12 



178 THE BATE OF WAGES. 

Wages-fund. I merely note this point at present as bearing 
upon the controversy respecting the future of the laboring 
classes, reserving the full consideration of the latter question 
for another place. There are those who regard it as a law of 
industrial development that capital should ever become more 
and more aggregated in a few hands, and that, as a conse- 
quence of this, the position of the laborer in the future must 
remain substantially what it is at present in the more advanced 
industrial countries — that of a recipient of wages merely. I 
do not pretend here to pronounce upon this question— the eco- 
nomic data for its determhiation have not yet been fully 
worked out ; but I am justified even here in asserting this 
'~ much, that the permanent maintenance of a regime such as is 
contemplated, co-existing with a progressive industry, can only 
issue in one result — a constant exaggeration of those features 
already beginning to mark so unpleasantly the aspect of our 
social state — namely, a harsh separation of classes, combined 
with those glaring inequalities in the distribution of wealth 
which most people will agree are among the chief elements of 
our social instability. 



)L 



§ 10. I remarked just now, that under a progressive state 
of industry, though the proportion of the Wages-fund to the 
whole capital of a country diminishes, the positive amount of 
the fund for the most part undergoes increase. It must be 
confessed, however, that while this represents the ordinary 
rule, there is nothing strictly necessary in the relation of the 
phenomena thus presented ; and that instances do occur, and 
sometimes on a large scale, in which the progress of wealth 
and industry is accompanied with a positive contraction of the 
Wages-fund. Such a result happens whenever that process 
takes place which is described by economists as a conversion 
of circulating capital into fixed. 

As Mr. Mill has remarked, the proceeding in question is not 



INDUSTRIAL CRISES. 179 

one which in practice is frequently resorted to; the introduc- 
tion and extension of fixed capital being, as a general rule, ef- 
fected through the agency of fresh savings rather than by with- 
drawal from the support of labor of funds already thus employ- 
ed. But it is beyond question that such conversions of circu- 
lating into fixed capital do sometimes occur; and, in this event, 
it is not less certain that the Wages-fund must, at all events for 
a time, be curtailed. For the most part, however, it happens 
that movements of this kind are on a limited scale, and, the re- 
sulting arrangements always issuing in increased efficiency of 
production (for this is the motive for adopting them), the gaps 
made in the Wages-fund are quickly filled up ; so that the con- 
sequences which ensue, though perhaps serious enough, are 
rarely of large dimensions. I say this is what usually happens 
when circulating capital is converted into fixed ; but there are 
times when the process is conducted on something like a na- 
tional scale, and then it may be productive of even disastrous 
results. An occasion of this kind, for example, occurred in the 
industrial history of England during the sixteenth century, 
when the exchange of a very rude and primitive agriculture 
for one that might by comparison be called scientific, and more 
particularly an extensive conversion of tillage-lands to pasture, 
under the influence of causes then affecting her general trade, 
issued in the remarkable phenomenon of a rapidly growing 
national capital, with improved industrial processes and ex- 
tending trade, accompanied by a sudden and portentous de- 
velopment of pauperism. No doubt the recuperative power 
of progressive industry told in the long run ; and perhaps be- 
fore the century was over, or the new Poor Law had well come 
into operation, the encroachment made on the laborers' division 
of the national wealth had been more than repaid : but it is 
nevertheless true that the event amounted to a crisis in the 
national industry, and was, for a large portion of the people, 
frausht with disaster and ruin. Something of the same kind 



180 TRE BATE OF WAGES. 

lias been in progress in our own day in Ireland. A protective 
Corn Law, combined with the demoralization of the people 
from political and social causes, had generated an industrial 
system which could not be permanently sustained. Under the 
combined influence of free trade and the potato disease this sys- 
tem suddenly collapsed, and it became necessary to pass from 
a crude regime of tillage to one in which capital was extensive- 
ly converted into fixed and permanent forms. The result has 
been the introduction of an agriculture suited to the country, 
and largely carried on by improved modern processes, and a 
rapid increase in general wealth ; but simultaneously with this 
a sudden contraction of the Wages-fund, of which the unequiv- 
ocal evidence is found in a population reduced in a few years 
r^ from eight to five and a half millions. Occurrences of this 
kind place it beyond doubt that extensive changes in the 
character of the industry of a country, even though they be 
all in the direction of scientific progress, improved processes, 
and ultimately and even immediately augmented wealth, may 
nevertheless effect a reduction in the means for supporting 
productive labor, and may for a time act disastrously on its 
interests. 

§ 11. I have now stated the doctrine of the Wages-fund as 
I understand it, in connection with the general problem of the 
rate of wages ; but before proceeding to trace its bearing upon 
the relations of capital and labor, and the various practical 
questions arising therefrom, it will be convenient to pause 
here for a short time in our development of the general theo- 
ry, in order to consider the objections which have been urged 
against the doctrine by Mr. Thornton— objections which, as I 
have already informed the reader, have been powerful enough 
to effect the conversion of Mr. Mill. Mr. Thornton's argu- 
ment ranges over a considerable portion of his volume, but 
the gist of it will be found in the following passage: 



MB. THOENTON'S OBJECTIONS. 181 

' "If there really were a national fund, the whole of which must neces- 
sarily be applied to the payment of wages, that fund could be' no other 
than an aggregate of smaller similar funds possessed by the several indi- 
viduals who composed the employing part of the nation. Does, then, 
any individual employer possess any such fund ? Is there any specific 
portion of any individuaPs capital which the owner must necessarily ex- 
pend upon labor ? Of course eveiy employer possesses a certain amount 
of money, whether his own or borrowed, out of which all his expenses 
must be met, if met at all. With so much of this amount as remains af- 
ter deduction of what he takes for family and personal expenses, he car- 
ries on his business — with one portion of that balance providing or keep- 
ing In repair buildings and machinery, with a second portion procuring 
materials, with a third hiring labor. But is there any law fixing the 
amount of his domestic expenditure, and thereby fixing likewise the 
balance available for his industrial operations ? May he not spend more 
or less on his family and himself, according to his fancy — in the one case 
having more, in the other less, left for the conduct of his business ? And 
of what is left, does he or can he determine beforehand how much shall 
be laid out on buildings, how much on materials, how much on labor? 
May not his outlay on repairs be unexpectedly increased by fire or other 
accident ? will not his outlay on materials vary with their dearness or 
cheapness, or with the varying demand for the finished article ? and 
must not the amount available for wages vary accordingly ? And even 
though the latter amount were exactly ascertained beforehand, even 
though he did know to a farthing how much he would be able to spend 
on labor, would he be bound so to spend the utmost he could afford to 
spend ? If he could get as much labor as he wanted at a cheap rate, 
would he voluntarily pay as much for it as he would be compelled to 
pay if it were dearer ? It sounds like mockery or childishness to ask 
these questions, so obvious are the only answers that can possibly be 
given to them ; yet it is only on the assumption that directly opposite 
answers must be given that the Wages-fund can for one moment stand. 
For if in the case of individual employers there be no Wages-funds — no 
definite or definable portions of their capitals which, and neither more 
nor less than which, they must severally apply to the hiring of labor — 
clearly there can be no aggregate of such funds, clearly there can be no 
national Wages-fund, And be it observed, fixity or definiteuess is the 
very essence of the supposed Wages-fund. No one denies that some 
amount or other must within any given period be disbursed in the form 



1B2 THE RATE OF WAGES. 

of wages. The only question is, whether that amount be determinate 
or indeterminate. If indeterminate, it can not of course be divided, and 
might as well not exist for any power it possesses of performing the sole 
function of a Wages-fund, that, viz., of yielding a quotient that would 
indicate the average rate of wages."* 

Mr. Thornton, the reader will perceive from this passage, 
does not deny the existence of a Wages-fand: he admits the 
legitimacy of contemplating in the aggregate those funds — the 
wages of individual workmen — of which we know the exist- 
ence in detail ; but he contends that neither the particular sums 
in detail, nor therefore the aggregate which they compose, are 
" determinate " — an expression under which he includes at once 
their "predetermination" toward the destination they after- 
ward receive, and their " limitation " within their actual bounds. 
It must at once be conceded that, in the sense in which (as ap- 
pears from this passage as well as from the whole tenor of his 
argument) Mr. Thornton understands the " predetermination " 
and "limitation" of the Wages-fund, his position is unassail- 
able. Undoubtedly " there is no specific portion of any indi- 
vidual's capital which the owner must necessarily expend upon 
wages." "There is no law fixing the amount" of any man's 
" domestic expenditure, and thereby fixing likewise the balance 
available for industrial operations." Nor is any man "bound 
to spend," in the payment of labor, " the utmost he can afford 
to spend." I should have confidently asserted, I will not say 
that no economist, but that no reasonable being had ever ad- 
vanced the theory of a Wages-fund in this sense, if it had not 
been that Mr. Mill had accepted the reasoning I have quoted 
as a refutation of that theory .f As it is, I can only say that 

* "Labor, etc.," pp. 84, 85. 

t Mr. Mill's acceptance of Mr. Thornton's argument on this point is the more 
perplexing as he has himself, in more than one passage of his work, strenuously- 
disclaimed that notion of an economic law against which Mr. Thornton's reason- 
ing is directed, and, on the other hand, asserted the liew for which I contend in 



MB. THORNTON'S OBJECTIONS. 183 

this is not the sense in which I have myself understood the 
doctrine (and I first learned it from Mr. Mill's pages) ; and fur- 
ther, I must add, that if economic doctrines in general are to be 
understood in the sense here assigned to the Wages-fund doc- 
trine — namely, as expressing principles which compel human 
beings to the adoption of certain courses of conduct in despite 
of their own inclination and will, there is not a single one with- 
in the range of economic science that could endure ten minutes' 
criticism. The doctrine, for example, that the supply of a 
commodity tends to conform to the quantity demanded at the 
normal price, is as well established as any principle of Political 
Economy. How is it proved? By showing that, if the supply 
of the commodity falls short of this quantity, the market price 
will rise above the normal price, profits on the production will 
be exceptionally high, and, as a consequence, a larger amount 
of capital and labor will be "determined" toward the produc- 
tion ; while in the contrary case the " determination " of capi- 
tal and labor would be in the opposite direction. But if by 
"determination" of capital is to be understood some force 
which compels the capitalist irrespective of his own wishes and 
views of his own interest, the reasoning is manifestly ground- 
less. Mr. Thornton might say here, quite as truly as in his 
argument against the Wages-fund, there is no law, physical or 
legal, there is no moral principle, which compels any capitalist 
to employ his capital in a branch of production simply because 
profits in that branch are rising. Again, take the law of rent : 
how is that law established ? By some such reasoning as this, 
namely, by showing that the competition of farmers for land 

the text: for example, in the following: "Demand and supply are not physical 
agencies, which thrust a given amount of wages into a laborer's hand without the 
participation of his own will and actions. The market rate is not fixed for him 
by some self-acting instrument, but is the result of bargaining between human be- 
ings — of what Adam Smith calls ' the higgling of the market.' " (Book v., chap. 
^•, § 5.) 



184 THE BATE OF WAGES. 

will "determine" to the possession of landlords all that profit 
upon land which is in excess of the ordinary profits upon in- 
dustry ; while the competition of other occupations with agri- 
culture will prevent the amount so determined from rising be- 
yond the limits of the exceptional profit. But what is to pre- 
vent Mr. Thornton from interposing here the same series of 
objections he has urged against the Wages-fund? "Eent," 
he might exclaim, " determined by the law of exceptional prof- 
it ! Is there any specific portion of a farmer's capital which 
the owner must necessarily expend upon rent? And who can 
tell beforehand what the amount of his exceptional profit will 
be ? May not his outlay on repairs be unexpectedly increased 
by flood or other accident? Will not his outlay on materials 
vary with their dearness or cheapness, or with the varying de- 
mand for the produce? and must not the amount available 
for rent vary accordingly ? And even though the amount of 
exceptional profit were exactly ascertained beforehand, even 
though the farmer did know to a farthing how much he would 
be able to pay to the landlord, while reserving average profit 
to himself, would he be bound so to spend the utmost he could 
so afford to spend?" And so the theory of rent would collapse, 
and Mr. Thornton might enjoy an easy triumph over Eicardo 
and all who have since followed in his wake. In short, it is 
evident that, if this style of reasoning be legitimate, the whole 
structure of economic doctrine must inevitably go down. 

What then is the answer to Mr. Thornton ? Why, I take 
it, this: that his reasoning from beginning to end proceeds 
upon a radically erroneous conception of the nature of an eco- 
nomic law — of what is meant by "predetermination" and 
"limitation" in the sphere of economic action, A "law" in 
Political Economy does not mean either legal coercion or 
physical compulsion, or yet moral obligation ; nor does the 
"determination" expressed in an economic law mean the nec- 
essary realization of certain resultsindependently of the human 



MB. THOBNTON'S OBJECTIONS. 185 

will. What an economic law asserts is, not that men must do 
so and so whether they like it or not, but that in given circum- 
stances they will like to do so and so ; that their self-interest 
or other feelings will lead them to this result. The predeter- 
mination in question is of that sort which leads a hungry man 
to eat his dinner, or an honest man to pay his debts, and de- 
pends for its fulfillment, not upon external compulsion of any 
sort, but upon the influence of certain inducements on the will, 
our knowledge of which enables us to say how in given cir- 
cumstances a man will act. It is in this sense that, speaking 
for myself, I understand the "predetermination" of a certain 
portion of the wealth of a country to the payment of wages. 
I believe that, in the existing state of the national wealth, the 
character of Englishmen being what it is, a certain prospect of 
profit will " determine " a certain proportion of this wealth to 
productive investment ; that the amount thus " determined " 
will increase as the field for investment is extended, and that 
it will not increase beyond what this field can find employ- 
ment for at that rate of profit which satisfies English commer- 
cial expectation. Further, I believe that, investment thus tak- 
ing place, the form which it shall assume will be " determined " 
by the nature of the national industries — "determined," not 
under acts of Parliament, or in virtue of any physical law, but 
through the influence of the investor's interests; while this, 
the form of the investment, will again "determine" the pro- 
portion of the whole capital which shall be paid as wages to 
laborers. It is in this sense I say that I understand the " pre- 
determination " implied in the Wages -fund doctrine; and 
against the doctrine so understood I can not find that there is 
any thing very formidable in Mr. Thornton's criticisms. They 
are simply beside the mark — at all events, beside my mark. 
"Capitalists put aside a portion of their means with a de- 
termination that, whatever happens, they shall be spent in 
wnges!" — The doctrine, as I understand it, makes no such 



r 



186 TEE BATE OF WAGES. 

assumption ; nor am I, in holding it, bound to maintain any 
such absurdity. " Employers are anxious to buy their labor 
as cheap as they can, to spend as little as possible in wages." 
— No doubt they are ; but while they are anxious to get their 
labor cheap, they are also anxious to place certain amounts of 
their wealth at profitable investment ; and, to do this in the 
most advantageous way, a certain proportion of the sums so 
. invested must go to the payment of wages. 

I say deliberately " 7nust " go to the payment of wages, for 
this is the consequence involved in the doctrine I have endeav- 
ored to expound. Assuming a certain field for investment, 
and the prospect of profit in this such as to attract a certain 
aggregate capital, and assuming the national industries to be 
of a certain kind, the proportion of this aggregate capital which 
shall be invested in wages is not a matter within the discre- 
tion of capitalists, always supposing they desire to obtain the 
largest practical return upon their outlay. To accomplish this, 
the instruments of production, labor, fixed capital, and raw 
material must be brought together in certain proportions — a 
condition which requires, as I have shown — the supply of la- 
bor being given — a distribution of the aggregate capital in cer- 
tain proportions among those instruments. Supposing, now, 
capitalists to succeed in forcing down the rate of wages below 
the point at which, having regard to the number of the labor- 
ing population, the amount, which the fulfillment of this con- 
dition would assign to the payment of wages, was absorbed — 
either the capital thus withdrawn from the Wages^fund must 
remain uninvested and therefore unproductive, or_lf_inyested, 
and not invested in wages, it would take the form of fixed 
capital or raw material. But by hypothesis the fixed capital 
and raw material were already in due proportion to the labor 
force, and they would consequently now be in excess of it. 
A competition among capitalists for labor would consequently 
ensue; and what could this end in but a restoration to the 



MB. THORNTON'S OBJECTIONS. 187 

Wages-fund of the amount withdrawn from it? Mr. Thorn- 
ton probably would tell me that the amount saved from the 
payment of wages might, and probably would, be turned to 
swell the private expenditure of capitalists, who, taking out 
the results in this form, would simply continue to receive 
larger profits at the expense of their workmen. No doubt 1 
this is a possible contingency in particular cases, but, the char- ^ 
acter of the wealthy classes remaining on the whole what it is, 
increased accumulations in other quarters would neutralize ex- 
ceptional extravagance in some ; and larger profits would not 
be less powerful than before to attract increased investment.^ 
In a word, my argument brings me back to the position from 
which I started, that, the aggregate investment being deter- 
mined by certain mental and physical conditions, and the na- n^ 
tional industries being such as they are, there is but one dis- 
tribution of the capital invested which is consistent with the 
greatest advantage to the investors. That distribution in- 
volves a certain proportion spent in the payment of wages, and 
it is to this result that capitalists, if true to their own interest, 
must conform their conduct* 

* The notion that any portion of the wealth of the country should be "deter- 
mined " to the payment of wages would seem also to shock Mr. Longe's sense of 
economic propriety ; which is strange, seeing that his own doctrine that it is " the 
demand for commodities which determines the quantity of wealth spent in the 
payment of wages " plainly involves this consequence. He puts the case of a cap- 
italist who, by taking advantage of the necessities of his workmen, effects a reduc- 
tion in their wages, and succeeds in withdrawing so much, call it £1000, from the 
Wages-fimd ; and asks how is the sum, thus withdrawn, to be restored to the 
fund ? On Mr. Longe's principles the answer is simple — "by being spent on com- 
modities;" for it may be assumed that the sum so withdrawn will, in any case, < 
not be hoarded. " But," urges Mr. Longe, " it might be spent on foreign wines, 
or on a trip to Switzerland;" the suggestion of course being that in this case tha 
expenditure could do no good to English labor. If so, then we seem to have 
made a mistake in repealing our protective laws ; nor were protectionists, after all, 
so very wrong in seeking to encourage native industry by compelling expenditure 
toward domestic productions. May I venture to remind Mr. Longe that expenui- 



188 THE BATE OF WAGES. 

So far as to one leading objection urged against the Wages- 
fund doctrine. It is further contended that the doctrine as- 
sumes the existence of a limitation to the amount of that fund 
for which there is no warrant in facts. As Mr. Thornton puts 
it, " may not the capitalist spend more or less on his family and 
himself according to his fancy — in the one case having more, 
in the other less, left for the conduct of his business?" The 
aspect of the question here brought into view involves consid- 
erations of so much importance that it will be best discussed in 
a separate chapter. 

ture on foreign wines and in Swiss travel must and can only be paid for by an ex- 
port of British productions, and that it therefore creates a demand for such pro- 
ductions, though more circuitously, quite as certainly as if it took a more direct 
form. The answer, therefore, to the case put by Mr. Longe is easy on his own 
principles ; and I am disposed to flatter myself that the reader who has gone with 
me in the foregoing discussion will not have much difficulty in replying to it upon 
Eaine. 



CHAPTER II. 

DEMAND FOR COMMODITIES— WAGES AND PRICES. 

§ 1. I MUST here depart for a space from the main line of 
my argument in order to work out a side issue already partial- 
ly dealt with, over which I think it must be confessed, not- 
withstanding some considerable discussion already bestowed 
upon it, no small amount of obscurity still hangs. I mean the 
question as to the relation existing between the demand for 
commodities and the interests of those who live by labor. We 
have already seen that this relation is not what it is commonly 
supposed to be : the demand for commodities does not deter- 
mine the quantity of wealth spent in the wages of labor. Still, 
it is not to be denied that the agency in question stands in in- 
timate relation with the wealth thus expended, or, as I call it, 
the Wages-fund ; and my purpose now is to attempt some 
more precise determination of the character and the extent of 
the connection than has yet been given by writers on economic 
science. 

With a view to this it will be convenient to distinguish two 
conditions of demand for commodities : (1) Where, the aggre- 
gate expenditure on commodities remaining the same, a change 
takes place in its direction, as, for example, when a country 
passes from a state of peace to one of war, or when any con- 
siderable change occurs in the tastes or habits of the people 
leading to a diversion of expenditure from certain classes of 
objects to others ; and (2) where, as the consequence of a posi- 
tive growth of purchasing power in a community, the aggre- 
gate demand for commodities undergoes increase. 



190 THE DEMAND FOB COMMODITIES. 

§ 2. I. That a change in the mode in which the general in- 
come of a country is spent, if occurring on a considerable scale, 
is capable of affecting the condition of labor in different branches 
of industry, is extremely obvious; nor can there be much dif- 
ficulty as to the manner in which the results are brought about. 
A change of fashion, for example, taking place, certain com- 
modities are brought into increased demand, while the demand 
for others declines. The productive and distributive arrange- 
ments of the country having been made with a view to a dif- 
ferent state of the public requirements, the supply of the for- 
mer articles will be insufficient, and they will therefore rise in 
price ; while the supply of the latter will be in excess, and they 
will fall. But, as I have pointed out, the price of the product 
is the fund from which the remuneration of capital and labor 
— viewing production as a continuous act — is derived ; and this 
fund has now been increased in certain branches of industry 
and curtailed in others. It follows that capital or labor, cr 
both, will receive in the former employments more, and in the 
latter less, than average rewards ; and this state of remunera- 
tion will continue until, by increasing the supply of the one 
sort of products and reducing that of the other, prices are re- 
stored to their former level — a consummation which will only 
be accomplished when capital and labor in the industries affect- 
ed have been re-adjusted to meet the altered conditions of the 
public demand. The immediate result will thus be, as regards 
such industries, a change in relative wages or profits, or in 
both. In point of fact, as we shall hereafter see, the effect is 
generally divided between both branches of remuneration, and 
for the present I shall assume that this is the case. Where, 
however, competition among workmen is effective, such a change 
can not be permanent : it will only last until the labor force of 
the country has adapted itself to the altered conditions of the 
market. So soon as this is accomplished, prices, profits, and 
wages will return to their former condition. 



EFFECT ON RELATIVE WAGES. 191 

This is what will happen where competition is really efifect- 
ive. But we have seen that competition in the article of la- 
bor is not effective throughout the entire field of industry in a 
country like this. Certain industrial circles or groups exist, 
the workmen composing each of which, while competing among 
themselves, are, from social circumstances, excluded from effect- 
ive competition with the workmen of different groups ; with 
this result, that the relative value of the products of such non- 
competing groups are determined, not by cost of production, 
but by reciprocal demand. Now, where this is the case, a 
change in the mode of expending the general income of a 
community may, under certain circumstances, be attended 
with more than temporary consequences. For, supposing the 
change in expenditure to involve a transfer of demand from 
the products of one of those non-competing industrial groups 
to those of another, the result in the first instance would be the 
same as in other cases ; namely, an advance in the rates of re- 
muneration for laborers and capitalists within the group profit- 
ing by the enlarged demand, accompanied by a corresponding 
fall in the other group. But this would not be followed in the 
present instance by the same consequences as in the case in 
which effective competition prevailed. Capital, indeed, would 
still move freely to the more lucrative occupations ; but labor 
would not follow, or would follow in inadequate proportions; 
and the equalization of profits would be effected, not by a re- 
duction of prices, but by an advance of wages. To restore the 
prices of the commodities affected by the change in demand to 
their former relative level, it would be necessary to adjust the 
supply of these commodities to the altered conditions of de- 
mand; and to do this it would be necessary to distribute the 
labor force of the country in conformity with the altered re- 
quirements. But this is just what, under the circumstances 
we are supposing, it is not possible to do. The occurrence, 
therefore, would issue in an advance at once in the price of the 



192 THE DEMAND FOB COMMODITIES. 

products falling under the enlarged demand, and in the wages 
of the workmen engaged in their production, while profits, 
after some fluctuation, would return to their former state; 
and, on the other hand, there would be an equivalent decline 
in prices and wages in the branches of industry from which 
the demand had been withdrawn, and these results would be 
definitive — that is to say, they would continue until social prog- 
ress had removed the barriers which interfered with industrial 
competition, or until the altered condition of the workmen in 
the different industrial groups should have acted on the growth 
of population within the groups. In this way, then, a mere 
change in the direction of national expenditure may issue in 
permanent effects in the relative remuneration of laborers. 

It need scarcely be remarked that in occurrences of this na- 
ture, whether the results are temporary or permanent, no ad- 
dition would be made to the aggregate Wages-fund, nor there- 
fore to the well-being of the laboring population as a whole.* 
The effects would be limited to a mere transference of wealth 
from certain groups of workmen to others, so that the gains 
would always be compensated by corresponding losses. The 
former might indeed be sometimes concentrated and the latter 
diffused, and the gains might in consequence be seen and the 
losses not seen ; or the contrary result might happen. But, 
from the nature of the case, there could be no clear gain : if 
Peter were enriched, there would always be some Paul at 
whose expense it was done.f 

* The tendency indeed is the other way ; since a portion of the products of in- 
dustry having, in consequence of the change in the public tastes or requirements, 
been deprived of their power of satisfying human wants, a certain amount of pro- 
ductive eflFort would have been wasted, and consequently the aggregate wealth 
must for a time have suffered diminution. The loss, however, would not necessa- 
rily be shown in the average rates of wages or profits (measured in money, which 
I suppose constant in value), but would be realized by the public at large, includ- 
ing capitalists and laborers, in their capacity of consumers. 

t In theoretical strictness, this position needs qualification. It would only be 



IN THE INTERNATIONAL SPHERE. 193 

And what may happen to a particular industrial group in 
its relation to other industrial groups in the community of 
which they form parts, may happen equally, and through the 
action of precisely the same causes, to an entire community in 
its relation to other communities in the larger society of com- 
mercial nations. For, as has been already pointed out, inde- 
pendent nations occupy, as regards the circumstance of indus- 
trial competition, a position entirely analogous to that of the 
industrial groups which we have been contemplating. Labor 
passes from country to country, indeed, with even greater diffi- 
culty than from the less to the more highly skilled industries 
within the same country ; and the consequence is that changes 
in the international demand for commodities are even more 
likely to issue in permanent effects on the rates of wages 
in different countries than similar changes in the domestic 
demand to produce permanent consequences in the internal 
rates. Thus any circumstance which should turn any consid- 
erable portion of the general purchasing power of commercial 
nations from English toward French productions, or vice versa^ 
would have the effect of enhancing in France and depreciating 
in England, or vice versa, the general value of products. The 



strictly true, if the Wages-fund bore always the same proportion to the capital 
employed in production, which is not the fact. Supposing, e. g., expenditure 
were largely directed from clothing to food, and that in consequence capital were 
transferred from manufactures to agriculture, inasmuch as a given amount of cap- 
ital employed in agriculture will in general contain a larger element of Wages- 
fund than the same amount of capital employed in manufoctures (owing to the 
liu-ger use of fixed capital in the latter case), it follows that a substitution of a de- 
mand for food for a demand for clothes would in this case issue in an increase of 
the aggiegate Wages-fund; as a substitution in the contrary sense would have 
the opposite effect. A change of this kind, however, occuiring in Great Bi-itain, 
would not probably be attended with any such consequences, because it is not 
probable that it would lead to any transference of capital to agriculture. The ad- 
ditional food would be obtained from foreign countries through an extension ot 
our exports. 

13 



194 THE DEMAND FOB COMMODITIES. 

wealth of one country would be increased, that of tbe other 
diminished, and the results just traced would be realized on 
an international scale. Here, however, as in the former case, 
although the laboring classes of an entire community might 
be benefited, yet, taking an international or cosmopolitan 
view, there would be no clear gain for the interests of labor. 
It would be merely so much withdrawn from industrial well- 
being in one country in order to be added to the same cause 
in another. 

§ 3. II. Such changes in the demand for commodities are 
in the nature of mere diversions of purchasing power, where 
the aggregate amount remains the same. But the aggregate 
purchasing power of a community, or of the world, may ex- 
perience increase, and, in fact, is pretty constantly increasing; 
and we have now to consider what may be the effect on 
the Wages-fund of an increased demand for commodities aris- 
ing under this state of things. Now here it is most impor- 
tant to observe that the increased demand for commodities 
is a mere incident in the general conditions which the as- 
sumed case supposes. An increase in the aggregate demand 
for commodities, resting on a larger aggregate of purchas- 
ing power— putting aside the case of a mere inflation of cred- 
it unsustained by any basis of real wealth — means an in- 
creased production of wealth ; and implies, therefore, a corre- 
sponding increase in the aggregate supply of commodities. 
Supply and Demand, in short, considered as aggregates, are, as I 
have already more than once observed, the reciprocals of each 
other, and in effect the opposite faces of the same facts. An 
article is produced and is offered in the market : it is now sup- 
ply, but the possession of that article confers upon the owner 
a purchasing power, and that power being exercised, the arti- 
cle becomes a source of demand ; nor is there any other source 
from which demand can spring. Demand, as an aggregate, 



GROWS AS WEALTH INCREASES 195 

can not increase without supply, nor supply -without demand. 
This is fundamental, the direct consequence of industry carried 
on upon the principle of division of labor. But, this being so, 
we are led to ask, what is the significance of the question 
which has been proposed? Suppose the Wages-fund to in- 
crease under the circumstances imagined ; and suppose further, 
that, in every instance, the increase is found to be connected 
with a demand for commodities — what then ? Have we sound- 
ed the problem when we attribute the result to the demand for 
commodities? Or rather, is it not very evident that, in offer- 
ing this as a solution, we are confounding the mechanism by 
which certain results are brought about with the motive forces 
which work through this mechanism. The upward and down- 
ward movements of the piston of a steam-engine are invariably 
preceded by certain movements of the valves which admit the 
steam alternately above and below it. As the action of the 
valves becomes more rapid, the movements of the piston be- 
come more rapid, and if the former ceases, the engine stops. 
Yet it will scarcely be maintained that the motion of the 
steam-engine is explained by referring it to the action of the 
steam-valves. This, however, is precisely the sort of explana- 
tion that satisfies those persons who undertake to explain an 
increase of wealth by reference to the demand for commodities. 
They observe, for example, a sudden increase of prosperity in 
some branch of industry, and they perceive that this has been 
preceded by an increased demand for the products of that in- 
dustry. They perceive also, that the increased prosperity of 
this industry will extend itself to others through the medium 
of a demand for products ; and from these again to others, in a 
still widening circle. Further they perceive, or at least, if they 
carry their study of the problem so far, they may perceive, 
that, when the supply of each commodity has been brought up 
to the enlarged demand for it, the returns on the industry de- 
cline to their normal level ; and again, that, where the exten- 



196 THE DEMAND FOB COMMODITIES. 

sioii of supply is carried beyond this point, and demand falls 
short, the gains are converted into losses. Trading gains are 
thus found in every instance to be associated with a demand 
for commodities, and trading losses with a failure of demand ; 
and our philosophers, struck with the coincidence, exclaim 
" tvpriKa !" and exultingly produce " the demand for commodi- 
ties " as the key to the industrial problem. It never occurs to 
them to inquire what set the economic valves in motion, or to 
reflect that the increased demand for commodities is itself a 
phenomenon requiring explanation ; but having traced the in- 
dustrial movements up to the valves of supply and demand, 
they consider their task accomplished, and all searching after 
remoter causes as supererogatory, if not profane. 

The real nature of the connection between the demand for 
commodities and the progress of industrial well-being is, after, 
all, not mysterious — at least for any one who bears in mind 
the elementary truth that our industrial system is founded 
upon division of labor. It results from this, that every in- 
crease of wealth implies an increase of products to be ex- 
changed — an increase, therefore, at once of demand and of sup- 
ply ; and it results also from this — seeing that the satisfaction 
of reciprocal needs is the end and purpose of the system — that 
a demand for a producer's or a dealer's commodities must al- 
ways be a condition precedent to the realization of his gains. 
This is the real nature of the connection ; which, though it im- 
plies a constant correspondence between the aggregate income 
of a country and the aggregate demand for commodities with- 
in that country, does not imply that the latter phenomenon is 
the cause of the former; nor that any particular branch of the 
aggregate income, such as that which supports the laboring 
population, must increase pari passu with the increase of the 
whole, or with that of the aggregate demand for commodities. 
If this were so, as the same argument would apply equally to 
all other branches of the aggregate income, it would follow 



GBOTVS AS WEALTH INCREASES. 197 

that the several constituent parts, into which the income of ev- 
ery community resolves itself, should always bear the same 
proportion to each other, and that, for example, wages, prof- 
its, and rent should always preserve the same relative mag- 
nitude. This ought to be a sufficient redudio ad absurdum of 
the doctrine. But I have already given direct proof of its 
fallacy. 

Of the well-being which results from a growth of national 
wealth, there is, however, one element which, though not prop- 
erly attributable to the increased demand for commodities, yet 
connects itself with this agency in a somewhat special and pe- 
culiar way. Adam Smith, in a well-known passage, has re- 
marked that the division of labor is limited by the extent of 
the market, and it is obvious that, not merely division of labor, 
but the use of machinery, is limited by this condition. Pro- 
duction, universally in manufacturing industry, and to some 
extent in agriculture, must be carried on upon a certain scale 
of magnitude before labor can be duly organized, and the most 
efficient appliances be brought into operation ; but production 
on this scale will not be profitable unless the demand for the 
commodity at the normal price be sufficiently great to take off 
the whole supply. Where, therefore, the scale of production 
has not already attained the maximum of efficiency, an en- 
larged demand for commodities, by permitting its extension, 
may lead to a more efficient organization of productive forces, 
and thus accelerate the growth of wealth. This consequence, 
indeed, has no special connection with the remuneration of la- 
borers, any more than with that of any other industrial class. 
But it at least favors, as every thing that tends to increase 
wealth and render industry more productive must favor, the 
growth of the Wages-fund. Even here, however, the attribu- 
tion of the result to the demand for commodities fails to set 
the phenomenon in its true light ; while this mode of stating 
the case is open to the objection of countenancing the notion 



198 THE DEMAND FOB COMMODITIES. 

that the demand for commodities may increase independently 
of the supply — a notion, as I have said, at the bottom of nearly 
all the confusion of thought that prevails on this subject. The 
fact only receives its adequate explanation when it is referred, 
neither to demand nor to supply, but to that extension of the 
field for the interchange of products incident to an increasing 
production of wealth, which leads to an augmentation at once 
of demand and of supply. 

In the remarks just made I have had in view the effect of 
an increase in the demand for commodities upon the condition 
of the laboring population as a whole. I have not considered 
its effect upon relative wages. But it is evident that what 
has been already said upon this aspect of the case in connec- 
tion with diversions of demand will apply here, with this dif- 
ference, that the changes in relative wages which may result 
from an increase in aggregate demand will in general be in the 
nature of different degrees of advance, and will not necessarily^, 
or in fact generally, issue in the positive depression of wages 
in any department of trade. According as the new demand 
takes one direction or another, certain industries will gain 
more or less largely than others ; and the capital of the coun- 
try will be distributed to meet this state of things ; but as, in 
the case we are now supposing, the aggregate capital of the 
country would almost certainly increase — whether in propor- 
tion to the increase in the aggregate demand for commodities 
or not would depend upon the general conditions affecting in- 
vestment — the larger application of it to particular industries 
would'not necessarily imply any withdrawal of it from others. 
Such changes, therefore, in relative wages as might occur would 
generally be in the nature of different degrees of advance; and 
these relative results would, as in the case of diversions of de- 
mand, be temporary merely or permanent, according as there 
was or was not an effective competition among the workmen 
in the industries concerned. • 



SUMMARY OF RESULTS. 199 

§ 4. Summing up the results of this discussion, we may lay 
down the following propositions : , 

I. Where the influence exerted by the demand for com- 
modities arises, not from an increase in its aggregate amount, 
but from a change in its direction, the effect is limited to a 
change in the distribution of the Wages-fund, without affect- 
ing the aggregate amount of wealth placed at the disposal of 
labor, 

II. Such changes in the distribution of the Wages-fund are 
attended with changes in the relative rates of remuneration in 
different branches of industry, leading to a rise in some and a 
fall in others ; and those changes may or may not be perma- 
nent, according as labor is free or not to move between the oc- 
cupations affected. Where competition among workmen is 
effective, the relative rates will after a little time be restored 
to their former level; but, where competition is not effective, 
the changes which take place become definitive — that is to say, 
will continue so long as social circumstances remain the same 
and the altered conditions of remuneration in the several in- 
dustrial groups do not operate to disturb the relation of popu- 
lation to capital within those groups. 

III. The influence thus exerted by changes in the demand 
for commodities may be operative on an international scale, 
and may thus affect the average level of wages throughout an 
entire community ; the gain, however, to the country profiting 
by the movement being always compensated by a correspond- 
ing loss incurred by some other country or countries. 

IV. When the change in the demand for commodities is in 
the nature of an increase in its aggregate amount, arising from 
a growth of general wealth, the increase of demand is here an 
accompaniment of conditions which are favorable to the growth 
of the Wages-fund ; but its connection with the consequences 
that ensue is not that of a causal kind: it is merely an inci- 
dent of the industrial mechanism by which, under a system of 



200 THE DEMAND FOE COMMODITIES. 

division of labor, the results of increased production are real' 
ized by individuals and classes. 

V. Such an increase in the aggregate demand for commodi- 
ties may, however, produce changes in the relative remunera- 
tion of labor, analogous to those produced by changes in the 
direction of demand — changes which, as in the former case, will 
be temporary or permanent according as the competition among 
the workmen concerned is effective or not. 

§ 5. The point of view which we have now reached will en- 
able us, I think, to set in a somewhat clearer light than has 
hitherto been done a problem of some intricacy — the nature 
of the relation between wages and prices. The doctrine laid 
down upon this subject in the best treatises of Political Econ- 
omy is contained in two propositions to the effect, first, that 
general wages (understanding by this general real wages, the 
real remuneration received by the workmen) and general prices 
have no necessary connection. High wages, we are told, do 
not make high prices, any more than high prices make high 
wages. And, secondly, that when the wages of any class of 
workmen are exceptionally high or low — that is to say, either 
above or below the rate prevailing in other occupations, allow- 
ance being made for the special circumstances of each case 
— then they do affect prices. Apparently it is not considered 
that in any case prices may affect wages. 

The first of these propositions I hold to be indisputably 
sound and quite fundamental. It is scarcely possible indeed 
that any one reflecting on the elementary conditions of human 
well-being should hesitate to admit its truth. For to suppose 
that the real wages of labor — the food, clothing, lodging, and 
other comforts and conveniences which go to form the remu- 
neration of industry — have any necessary connection with the 
general range of prices, is to suppose that the well-being of the 
mass of mankind is linked to the abundance or scarcity of the 



INCOMPLETE THEORIES. 201 

particular substance which happens to form the material of 
money ; nay, if the position taken be that money, wages, and 
prices must, as general facts, fluctuate together, it is to suppose, 
not only that the condition of the immense majority of human 
beings is determined by this purely artificial circumstance, but 
also that it is fixed and unchangeable ; since there could man- 
ifestly be no improvement in the laborer's condition if every 
augmentation of the money paid him was attended with a cor- 
responding diminution of its purchasing power. The first of 
the propositions laid down, therefore, must be taken as incon. 
trovertible; and yet perhaps there are few statements in eco- 
nomic science that are more apt to strike an outsider as par- 
adoxical. It would, on the contrary, be held by those- who 
only look at the phenomena from the practical stand-point 
that wages and prices are, as a general rule, strictly connected ; 
that high wages make high prices, and high prices high wages ; 
a view in support of which they would confidently appeal to 
experience, and might easily adduce facts which, at all events, 
the current theory, as it stands, wholly fails to explain. In 
short, there is here a conflict between the conclusions of theory 
and the generalizations of practical observers. Now where this 
happens, we may pretty confidently assume, even though, as 
in the case we are considering, the popular inductions can be 
shown to be erroneous and even absurd, that the theory also 
is in fault. It will in general at best be incomplete; and I 
think it will not be difficult to show that this is so in the pres- 
ent instance. 

The economic doctrine as to the relation between wages and 
prices, as commonly set forth, seems to be defective in two 
points. First, it fails to recognize, or at all events to take due 
account of the fact, that changes in general wages or prices 
never take place per saltum; that the general result is always 
reached by a succession of partial movements, usually extend- 
ing over a considerable period of time. And, secondly, the 



202 THE DEMAND FOB COMMODITIES. 

recognition given to the connection between prices and wages 
is quite inadequate. According to the current doctrine, prices 
may be effected by wages, where wages in particular trades 
are exceptionally high or low: this is the sole relation ac- 
knowledged to subsist between the phenomena; and the lan- 
guage suggests that the connection in this case is abnormal. 
Now, in the first place, it is not true that, where wages and 
prices vary together, wages are always the cause and prices 
the effect. In point of fact, the rise or fall of price more fre- 
quently precedes than follows that of wages. The most usual 
order of occurrence would probably be — a rise or fall of price ; 
then a movement of capital toward or from the trade ; and 
lastly an advance or fall of wages.* Instead of prices rising, 
in order to allow capital the current profit on a production in 
which wages have already risen (which is the usual way of put- 
ting the case),f the more common event is — wages for a time 
quiescent, until the exceptionally high profits of capitalists, due 
to a previous rise of price, attract new capital to the trade; then 
competition for labor, issuing in an advance of wages and a 

* Nearly such has been the order of proceedings in the recent movements in 
the iron and coal trades. "It is clearly shown," says the Select Committee on 
Coal (p. xi. of their Eeport) "that the real order of events has been the rise in 
the price of iron, the rise in the price of coal, and the rise in the rate of wages." 
I say " nearly such," because in this case the movement of capital toward the af- 
fected trades did not precede the advance of wages; the two latter stages of the 
process having been accelerated, and made to synchronize, by the action of strikes. 

t For example, Professor Fawcett writes: "It frequently happens that the 
wages of the laborers employed in the manufacture of a particular commodity 
advance as the demand for the commodity increases. If this occurs, these par- 
ticular manufactured goods will rise in price, in order that the employer may be 
compensated for the higher Avages he is now obliged to pay" ("Manual of Po- 
litical Economy," p. 290). That is to say, the increased demand for the com- 
modity will cause an advance in the wages of the laborers who produce it be/ore 
producing any effect upon its price. I confess that appears to me to be a scarce- 
ly possible occurrence : at least, I can not but regard it as an inversion of the 
usual order of events. 



INCOMPLETE THEORIES. 203 

fall of profits to the current level. Nor is the close corre- 
spondence and mutual interaction of the phenomena in any 
sense abnormal or exceptional: it may, on the contrary, be 
said to be the rule ; while the case in which they diverge or 
move independently of each other is the exception. The act- 
ual state of this portion of economic theory, therefore, however 
irrefragable so far as it goes, is plainly inadequate ; failing as 
it does to elucidate many familiar phenomena of wages and 
prices; and the purpose of the remaining portion of this chap- 
ter will be to supplement, as far as seems needful, existing de- 
ficiencies in this respect. 

§ 6. And here I must premise by observing that the relation 
which it is proposed to examine is that between prices and 
wages measured in money^ not that between prices and real 
wages; a remark which needs to be supplemented by an- 
other, viz., that it is not to be assumed on this account, that 
the real interest of the laborer is not involved in the discus- 
sion. A parallel movement between wages and prices is im- 
material where it is general, where all wages and all prices are 
affected at the same time and in the same degree. But, as 
I have already observed, this is what never happens. The 
changes which occur in prices and wages are always confined, 
for a period longer or shorter, according to circumstances, to 
particular branches of trade ; and where this is so, a change 
in money wages will generally* involve a change, though not 
necessarily a proportional change, in real wages too; since, 
owing to the circumstance that the movement is not general, 
it will place the recipients in a better or a worse position (as 
the case may be) in reference to all commodities of which the 
prices remain at their former level. Where in one or more 

* Not necessarily always — e.g., if the things which did not rise or fall vrere 
commodities only consumed by the rich, the laborer would be none the better or 
worse for the change. 



204 THE DEMAND FOB COMMODITIES. 

trades wages and prices advance or fall equally, the workmen 
in the trades thus affected will neither gain nor lose so far as 
they consume their own productions; but they will gain or 
lose to the full extent of the advance or fall in their wages so 
far as they consume the productions of other trades. So much 
being premised, I proceed now to the consideration of our 
problem. 

It has been already shown that a change in the demand for 
commodities, proceeding from a diversion of expenditure from 
its ordinary course, may produce a change in relative wages, 
raising the rate in some branches of industry and lowering it in 
others ; and, further, that occurring on an international scale, 
the same circumstance may affect the rate of wages throughout 
an entire community. Now in all such cases — and they com- 
prise a large proportion of all fluctuations in wages — the result, 
if not brought about through an action on prices, at least coin- 
cides with an action on prices: the two phenomena move al- 
ways in the same direction, and generally in parallel lines. 
The reasons for this have been already partially set forth, and 
will be presently more fully stated. But, again, not in such 
cases only, but, with a single important exception to be present- 
ly noticed, in all considerable movements of prices and wages, 
if not a strict parallelism, at least a general correspondence be- 
tween the phenomena of prices and wages will be found to ob- 
tain. An advance or fall of prices in any branch of production, 
if sustained for any considerable time, will, pretty certainly, be 
followed by an advance or fall of wages in the same industries; 
as an advance or fall of wages will with equal certainty be fol- 
lowed by an advance or fall of prices. In order to exhibit the 
' grounds of this statement, it will be desirable to consider the 
several sets of conditions (irrespective of that already referred 
to which consists in a change in the demand for commodities) 
under which important alterations in the rate of wages may 
take place. In what I am about to say I shall confine my at- 



COBBESPONDINa MOVEMENTS. 205 

tention chiefly to the case of an advance of wages ; but it will 
be obvious that precisely analogous considerations apply to 
that of a fall. 

§ 7. We may take then, first, the case of a new country, in 
which the rate of profit is still considerably above the practical 
minimum; in which, consequently, wages may rise at the ex- 
pense of profits, and therefore without any increase in the pro 
ductiveness of industry ; and we will suppose that the advance 
is occasioned by a growth of capital more rapid than that of 
population. The advance of wages which would occur under 
such circumstances would not be a mere relative movement— 
an advance in some industries balanced by an equivalent fall 
in others, such as occurs under the action of a demand for 
commodities, but an advance unaccompanied by any fall, and 
implying therefore a rise of the average rate. Even here, how- 
ever, though the movement might be ultimately general, it 
would still proceed by partial and limited steps. The new 
capital would not be distributed indifferently over all industries, 
but would be determined toward the particular industries in 
which at the moment there was the best prospect of an en- 
larged sale for products; and it would be in those industries 
that wages would first rise. But these would be the industries 
in which the products were selling above the normal rates. In 
other words, high wages, if not produced by high prices, would 
at least attend on high prices. And this coincidence would 
not be confined to the first steps, but would be maintained 
throughout the whole course of the ascending movement; 
which would be realized in the several industries in the order 
in which the prices of their products ranged above the normal 
level. It is true, indeed, the advance in wages and prices 
would not necessarily be a proportional advance. Wages 
might advance more than prices, or prices more than wages. 
And it is also true that the correspondence, such as it was, 



806 WAGES AND PRICES. 

miglit not be of long continuance ; since the increased produc- 
tion would sooner or later bring down the abnormally raised 
prices, while (profits not being at the minimum) the advance 
in wages might be maintained. But, conceding all this, the 
correspondence would still be generally maintained at all events 
while the movement was in progress ; while it is further to be 
considered that, as the case is that of a normal growth of capi- 
tal, unaccelerated by any important improvements in produc- 
tion, it is probable that population, under the stimulus of its 
bettered condition, would speedily overtake the increase of 
capital, in which event wages would subside to their former 
level ; and, in subsiding, would again follow the course indi- 
cated by prices, falling first in those industries in which prices 
were lowest. On the whole, then, in this case, though I do not 
pretend to say that the parallelism would be exact, and though 
it is possible the ultimate result might be a definitive diver- 
gence of the two phenomena ; still, speaking broadly, we may 
say that a general correspondence between prices and wages 
would be maintained, a correspondence quite sufficient to ac- 
count for the popular impression. '■ 

§ 8. Let us now consider another case : an advance in wages 
arising under a growth of wealth due either to improved in- 
dustrial processes, or to an extension of foreign trade. The 
latter cause, as I have already pointed out, would operate al- 
ways through a demand for commodities, and the advance of 
wages would therefore in this case be always preceded or at- 
tended by an advance of prices — not indeed, it must always 
be remembered, a general advance of prices, but an advance 
in the particular industries affected by the extension of for- 
eign trade. But, where the growth of capital proceeded from 
improved industrial processes, the course of things would be 
somewhat different. This is the case which offers the most 
striking excejDtion to the general correspondence between 



ADVANCE IN PRICES. 207 

wages and prices; for here, while wages would rise, prices in 
the industries profiting by the improved processes would fall. 
Nevertheless, though the rule would fail in the instance of 
those industries, it would receive abundant illustration from 
the accompanying phenomena. For one result of the cheap- 
ness effected in certain products would be to leave a larger 
amount of purchasing power available for expenditure in other 
directions. Hence would arise an increased demand for the 
commodities of other industries, which would be followed by 
an advance in their prices, by a larger application of capital to 
their production, and finally by a rise in the wages of the pro- 
ducers. The advance in prices would not indeed in this case 
(assuming the value of money to remain constant) be perma- 
nently maintained, at least where the competition among work- 
men was efiective ; but no more — profits being at the practical 
minimum — would the advance in money wages ; and the im- 
provement in the real wages of laborers, so far as it was per- 
nanently realized, would be only in proportion to the cheap- 
ening of products. On the other hand, where circumstances 
had given a virtual monopoly to any particular class of work- 
men, money wages and prices alike, as I have already shown, 
would remain permanently above the normal level; and such 
workmen would be enriched by a double process — they would 
receive larger money returns for their own labor, and would 
obtain the products of other industries at a reduced price. In 
this case also, then, though in certain branches of production 
there would be a marked divergence between wages and prices, 
in the great majority of industries the two phenomena would 
fluctuate together. 

§ 9. One case still remains to be considered, and it deserves 
our attention the more, as the influence which it exhibits is 
one now in constant operation — I mean the effects produced 
on wages and prices by an increased supply of the precious 



208 WAGES AND PRICES. 

metals, and a consequent depreciation of money. As the case 
is ordinarily represented, a depreciation of money takes effect 
in a uniform and simultaneous advance of all wages and prices ; 
a state of things which would leave the real well-being of the 
several classes of society substantially unaffected ; each person 
receiving a larger sum of money, and paying away a propor- 
tionally larger sum, in every transaction. But such a state- 
ment, though it expresses truly enough the final result of an 
increase of money, after the disturbances it creates have found 
their due correction — a result which it may take perhaps half 
a century to accomplish — yet, as an exposition of the actual 
phenomena which it purports to describe, must be pronounced 
to be absolutely erroneous. The supposition that wages and 
prices advanced jsan ^ass a over the whole area of productive 
industry is no more true where an increase of money is con- 
cerned than in any other case. The jiew money can only pro- 
duce its effects by being made the instrument of demand ; and 
the demand is not distributed indifferently over commodities 
in general, but is directed toward particular classes of commod- 
ities according to the needs and tastes of its possessors. What 
happens, therefore, in this case is what happens in all others. 
Certain commodities rise in price first; these are followed by 
others, and these again by others, the interval between the sev- 
eral steps being often of considerable duration ; and the ad- 
vance in prices is followed by an advance of wages. What 
chiefly distinguishes this case from those previously adverted 
to is, first, that the movement ultimately extends over the whole 
area of industry, embracing all occupations; and, secondly, that, 
though the prices of some commodities may temporarily drop 
from overproduction, and with them the wages of the producers, 
the normal level of both wages and prices is permanently raised.* 

* I say the "normal," not the actual, level; for prices might be actually lower 
than formerly, yet if production had been cheapened by improved processes in a 
still greater degree, the lower actual price would indicate a higher normal price. 



CONNECTING PRINCIPLES. 209 

The result of our examination, then, has been to show a 
very intimate relation subsisting between wages and prices. 
The movements indeed are not always in the nature of strictly 
parallel movements ; but they are always in the same direc- 
tion, and are manifestly under the attraction of some common 
influence. Nor can there be much difficulty in determining 
what that influence is. As I have already frequently remark- 
ed, the real source of the remuneration of producers, looking 
at production as a continuous act, is the value of their prod- 
ucts. Money wages and profits, therefore, as an aggregate, 
must vary in each branch of trade with the sum representing 
the aggregate products proceeding from the industry of the 
producers in that trade; or (assuming the efficiency of indus- 
try in the trade to remain constant)* with the prices of the 
specific commodities which constitute those products. If 
wages, therefore, do not rise or fall strictly in proportion to 
the money value of the aggregate products, or (in the absence 
of changes in productive power) to the prices of the specific 
commodities, it can only be because a larger share of the re- 
sult has fallen to profits, whether in the form of loss or gain. 
But profits will not remain permanently in any branch of 
trade above or below the normal level ; and the competition 
of capitalists will result either in lowering prices or raising 
wages, or, mutatis mutandis, in raising prices or lowering wages. 
In any case, wages and prices will gravitate toward each other. 
Where, indeed, prices have been reduced through improve- 
ments in production, the result will follow, not the variations 
in the price of the specific commodity, but those in the money 

* The reader will note the reason for this qualification. The price of the com- 
modity may rise or fall ; but, if it only rises or falls in proportion to the cost of 
production, the money value of the product proceeding from a given exertion of 
industry will remain the same. It is only on the supposition that the productive- 
ness of industry remains constant, that the price of the specific commodity will 
vary with the money value of the product. 

14 



210 WAGES AND PRICES. 

value of the aggregate product. This latter will be larger in 
proportion as industry is more productive; but the specific 
price falling with the cost, the money returns divisible among 
the producers will be the same as before;* and the ultimate 
gain for them will be realized, not in an increase of either 
wages or profits (measured in money), but in the lowered price 
of the article they produce. There is thus a real and funda- 
mental connection between money wages and prices. Yet I 
conceive it would be incorrect to describe either phenomenon 
as the cause or the effect of the other :f they are rather co-or- 
dinate results of a common cause— that cause being the in- 
fluence, whatever it may happen to be, which determines the 
products of a particular industry to exchange for those of 
others on more or less favorable terms than had previously 
obtained. 

§ 10. One point in connection with the problem we are con- 
sidering remains still to be cleared up. It has been strongly 
asserted that there is absolutely no necessary connection be- 
tween the high or low range of general prices and the real 
well-being of workmen : that high general wages do not make 



* I assume for convenience that the demand for the article wonld increase in 
proportion to the fall in the price. Thei'e is, of course, no necessity that this 
should happen ; but on any other supposition, with regard to the effect of the fall 
of price upon demand, the argument, though a little more complicated, would be 
equally valid. 

t In the cases which I have examined, the advance or fell in price would almost 
always precede the advance or fall in wages ; but it is quite possible that the 
change in wages should occur first, as happens, for example, when laborers by a 
strike compel an advance in wages, for which capitalists are led afterward to in- 
demnify themselves by putting an increased price upon their commodity — an ex- 
pedient which, it must be carefully borne in mind, is only possible when the cir- 
cumstances of the trade or the conditions of production are such as would in any 
case, after a time, lead to the same result, and probably by the more usual process 
in which the rise in prices precedes the rise in wages. 



MONETARY PARADOX. 211 

high general prices, nor high general prices high general 
wages (understanding wages here to mean the real remunera- 
tion of the laborer) ; and yet it has appeared from our investi- 
gation that money wages stand in intimate relation to prices, 
to a very great extent fluctuating with them ; while it has 
been also pointed out that changes in money wages are scarce- 
ly ever merely nominal, but almost always entail a real im- 
provement or deterioration of the workman's condition. These 
two positions, it is possible, may seem contradictory to some 
people; and it will therefore be desirable to look a little more 
closely than we have yet done into the reciprocal action of the 
several phenomena. For this purpose I will consider briefly 
the case in which the supposed discrepancy assumes its most 
prominent shape — that, namely, in which a rise of wages and 
prices results from an increase of money. 

To put the supposed contradiction in its strongest form — 
what results in wages and prices as the final outcome, from 
an increase of money, is a regime of higher nominal values in 
which all wages and all prices have risen in an equal degree; 
in which, therefore, it is evident, no one's real position, as re- 
gards command over the necessaries and comforts of life, is /h 
substantially altered : and yet, in each step toward the higher 
nominal level, the particular advance will have brought to the 
workmen whose wages are affected a distinct gain in real well- 
being. The final outcome of a process, every step of which is 
productive of positive effects, will thus be purely negative. 
The thing to be shown is, the process by which these several 
partial but positive movements issue in this general negative 
result; and for this a simple illustration will suffice. 

As I have already remarked, the advance in wages and 
prices under an increase of money will follow the direction 
of the demand for commodities. Now let us suppose the com- 
modity first to feel the effect of the increased money demand 
to be shoes •, shoes will then rise in price, and in due time the 



215^ WAGES AND PEICES. 

money wages of journeymen shoe-makers. But it is evident 
that this will be for the shoe-makers an advance of real wages; 
since, while receiving larger money wages than before, the only 
article of their consumption of which the price will have pro- 
portionally risen will be shoes. Next, we may suppose the 
enlarged demand to reach clothes, leading to a rise in the 
money wages of journeymen tailors ; but this, again, will be 
for the tailors a rise of real wages; for the case will stand 
thus: shoes have already risen; and the only prices affected 
as the condition of the advance in their wages will be the price 
of clothes: on all commodities, therefore, except clothes, the 
tailors will gain in full proportion to the rise in their money 
wages. It is plain that the same considerations will apply to 
e.very step in the ascending process, until the entire cycle of 
the industries is completed; at which point shoe-makers, tai- 
lors, and producers of all kinds will find themselves in posses- 
feion of incomes increased exactly in proportion as prices have 
risen — that is to say (excluding the gains and losses which may 
have been realized during the period of transition), neither bet- 
ter nor worse off than at starting. The solution of the enigma 
— if enigma it is to be considered — is of course to be found in 
the circumstance that the gain made by each class of workmen 
is in every instance obtained at the cost of other workmen, 
those namely whose wages do not share in that particular ad- 
vance. The journeyman shoe-maker is, in the first instance, 
benefited, when, receiving a larger money remuneration, he 
pays the same sum for his clothes, hats, and bread ; but the 
tailor, hatter, and baker, who, receiving the same money re- 
turns as before, have to pay more for their shoes, lose in the 
aggregate precisely what the shoe -maker gains. The subse- 
quent advance in their wages and prices deprives the shoe- 
maker, for the future, of so much of the gain accruing from 
the advance in his case, and places them at an advantage as 
regards other workmen ; whose wages and prices rising in 



MONETARY PARADOX. 213 

their turn gradually restore them to their original position, 
though at the expense of those who, during the period of 
transition, profited by their depression. Thus each class of 
workmen gains by the advance of money wages in its own 
case ; but as the circle extends, and the advance reaches other 
classes, those previously benefited part, item by item, with the 
advantage they had apparently secured, until in the end the 
real condition of each is restored to the orisjinal footins;. It is 
like the gains and losses at a round game of cards. Every time 
the pool is won, the winner is .richer precisely by the amount 
of the pool ; but, if the pool were always of the same amount, 
and each player won in turn, it is plain that at the end of the 
evening every member of the company would rise from the 
table neither richer nor poorer than he had sat down.* 

We may now resume the general argument interrupted by 
this incidental discussion. 

* Analogies do not run on all fours, and the present analogy is not perfect. 
The card-players at the close of the game would not merely have regained the 
relative positions from which they started, but would each have recovered the 
losses he had incurred during the progress of the game ; on the other hand, the 
gains and losses, incident to the period of transition from a low to a high regime 
of prices, would be definitive. 



CHAPTER III. 

TRADES- UNIONISM.— I. 

§ 1. The question whether in any given state of national 
■wealth there can properly be said to be a limit to the amount 
of wealth available for the payment of wages, and if so, what 
the nature of that limit is, is one which brings us into imme- 
diate contact with Trades-Unionism in its most ambitious, if 
not its most important, aims. If there be no limit to the fund 
available for expenditure in wages, or if such limit as exists 
be of a kind which may easily be overpassed ; if beyond the 
amount actually spent on wages at any given time there be an 
indefinite margin of wealth which workmen by judicious com- 
bination may conquer ; then it is evident Trades- Unionism has 
a great field before it, and workmen will naturally and prop- 
erly look to this agency as the principal means of improving 
their condition. But if, on the other hand, the amount of 
wealth spent in wages at any given time be confined within 
limits which, the conditions of industry and the cha racter of 
the owners of wealth being what they are, can not be perma- 
nently extended by the action ^^orkmen, then it follows 
that the scope for Trades-Union action is proportionally nar- 
rowed ; and all attempts to accomplish a permanent increase 
of wages by such means, beyond what the unassisted action of 
supply and demand would ultimately bring about, are doom- 
ed beforehand to disappointment and failure. The question, 
therefore, of the limitation of the Wages-fund is evidently one 
of paramount importance in the present position of the con- 
troversy between labor and capital in this country ; and we 



LIMITS OF THE WAGES-FUND. 215 

should approach the problem with all the care and circum- 
spection which so momentous an issue demands. 

§ 2. And, in the first place, I need scarcely point out that 
there are at all times certain limits to the possible Wages-fund 
which, if not strictly physical limits, come very close to that 
character. The Wages-fund of a country, at any given time, 
must, at all events, find a limit in the total wealth of the coun- 
try at that time, and manifestly, under any circumstances, it 
must fall very much short of that total ; for, in order to main- 
tain the stock of commodities of all sorts which in any civil- 
ized community goes to support the laboring population, a cer- 
tain large proportion of the general wealth must exist in the 
form of fixed capital and raw material. The wealth available, 
therefore, for the remuneration of labor can not at the utmost 
be more than the balance which remains after these indispensa- 
ble requirements have been provided for, under pain of a com- 
plete failure of the fund. These are what we may describe as 
the physical limits of the Wages-fund, and they are obviously 
such as must be observed under all forms of industrial organi- 
zation, even under a system of the most absolute communism. 
But the question I wish now to consider is whether, within ! 
these quasi physical limits, there are not, at least for societies 
organized as ours, and resting on the institution oFpfivate prop- y 
erty and personal freedom, what may properly be called eco- 
nomic limits — that is to say, limits arising from the action of 
human interests operating under the actual circumstances of 
man's environment in the world. Now the principles already 
established in this work, taken in connection with other funda- 
mental truths of economic science, will, I think, lead us to the 
conclusion that such limits do exist, and will also enable -us to 
perceive the character of the obstacles which they oppose to 
the indefinite extension of the Wages-fund. 

The reader has already seen the conditions on which depend 



216 TRADES -UNIONISM.— I. 

the investment of capital in productive industry, and the cir- 
cumstances which determine its distribution, when invested, 
among the several instruments of production. He has seen 
that the motive to its investment is the prospect of profit, and 
that, the character of the owners of wealth being given, the 
strength of the inducement will vary as this prospect varies. 
Such being the fundamental facts on which the accumulation 
and investment of capital depend, there exists for every in- 
dustrial society, as Mr. Mill has pointed out, a certain rate of 
profit which is the lowest that will suffice to call the accumu- 
lative principle leading to the investment of capital into action. 
This lowest rate of profit will be different for .different commu- 
nitleslind for different stages of civilization. It will be com- 
paratively high where the accumulative principle among the 
owners of wealth is weak, since here the inducement will need 
to be proportionally strong, and low where that principle is 
strong. But under all circumstances there will be a minimum 
rate, below which, if the return on capital fall, accumulation, 
at least for the purpose of investment, will cease for want of 
adequate inducement. Mr. Mill has further shown that in all 
progressive societies, after a certain stage in their career is 
reached — that stage, namely, at which the best soils and the 
most productive natural agents of all kinds have been brought 
into requisition for the purposes, of production — the tendency 
of profits is to fall, and ultimately to approach the minimum 
which exists for each society. This tendency is, indeed, con- 
stantly counteracted by the progress of invention and improve- 
ment in the industrial arts (including under this head the ex- 
tension of the field for division of labor by the growth of 
trade), but nevertheless it continues to operate, and on the 
whole prevails against the opposing forces. With every in- 
crease of capital, this stage in the economic growth of a coun- 
try once attained, a fall in the general rate of profit occurs, 
unless so far as the diminishing productiveness of industry is 



THE MINIMUM RATE OF PROFIT. 217 

compensated by these incidents of progressive societies, until 
at length capital in its growth reaches the point at which the 
rate of profit is at, or, to borrow Mr. Mill's expression, within 
a hand-breadth of, the minimum. Lastly, Mr. Mill has shown 
that in countries in which capital has grown to this point, and 
among such countries, pre-eminently in Great Britain, the prin- 
ciple leading to accumulation is, as a rule, always strong enough, 
not merely to keep the aggregate capital of the country up to 
that amount at which profits approximate to the minimum, but 
even to cause it to exceed this amount ; the proof of which 
lies in the large and continuous exportation of capital which 
occurs in such cases for investment in colonies or in foreign 
states. It results from these several positions that the amount 
of capital actually invested in Great Britain and in countries 
similarly circumstanced is, as a rule, at or close upon its max- v 
imum — that is to say, as great as, economically speaking, it can 
be in the actual state of the industrial arts and of general trade. 
Such is the doctrine of the "tendency of profits to a mini- 
mum," for the proof of which I must refer the reader to Mr. 
Mill's chapter on that subject;* and I have now to ask him to 
consider the bearing of this doctrine upon the problem we have 
undertaken to discuss. As he has seen, it is of the essence of 
the doctrine, first, that, in any given state of the arts of indus- 
try and of trade, the quantity of capital which can be employ- 
ed in a country is strictly limited, limited by those conditions 
which limit the inducement to save and invest — to perform 
those acts, that is to say, which constitute the source and spring 
from which capital is derived and fed ; and, secondly, that, in 
countries which have attained that stage in their economical 
development which England has long ago reached and passed, 
the accumulation of capital under the influence of the ordinary 
motives, is, as a rule, constantly in excess of the amount which 

* "Principles of Political Economy," book iv., chap. iv. 



218 TBADES -UNIONISM. —I. 

can be invested in the country consistently with obtaining the 
minimum rate of profit. These things being so, what can be 
the effect of an attempt on the part of Trades-Unions to com- 
pel, by pressure upon capitalists, an increase of the Wages- 
fund? Such an increase can only be accomplished in one or 
other of two ways — either by an increase of the total capital 
invested, or by a change in its distribution among the several 
agents of which it consists, in favor of labor, for example, by a 
conversion of what now goes to maintain machinery to the 
payment of wages. But either of these courses would inevita- 
bly result in a fall of profits, and profits are already at or with- 
in a hand-breadth of the minimum. It is true that the field 
for the investment of capital is being constantly extended in 
this and other progressive countries. Every step in the prog- 
ress of industrial invention, every gain in the efficiency of 
labor, every new market opened to our trade, pushes farther 
back the limit set by the minimum of profit, and creates new 
room for the investment of capital. But the doctrine we have 

p been considering shows us that the ordinary motives pressing 
upon capitalists are always sufficient, of their inherent strength, 
to fill UD the room thus constantly created for fresh investment, 
and do in fact fill it up ; and this being so, where is the scope 

\^ for Trades-Union action in enlarging the Wages-fund ? I con- 
fess I am unable to see how, in presence of these considera- 
tions, founded as they are on incontrovertible facts, the larger 
pretensions of Trades-Unionism can be sustained. The per- 
manent elevation of the average rate of wages — or, what comes 
to the same thing, the permanent elevation of the rate of wages 
in any branch of industry not accompanied by an equivalent 
fall in some other branch or branches — ^beyond the level deter- 
mined by the economic conditions prevailing in the country, 
is, as it seems to me, a feat beyond its power. Such is the 
broad general conclusion to which economic principles applied 
to the facts of the case appear to conduct us. 



LIMITS OF ITS POWEB. 219 

§ 3. We must be carefal, however, not to strain this con- 
clusion beyond the limits which its terms define. The reader 
will observe that it applies to the average rate of wages, as a 
permanent state of things, and further, that the question is left 
open as to the possibility of accelerating the operation of eco- 
nomic conditions, by action on the part of those whom they 
affect. Now it will be found that, these qualifications of the 
position just laid down duly considered, a certain scope still 
remains for Trades-Union action on the rate of wages — a cer- 
tain scope, but of a range altogether more limited than that 
which the pretensions of those bodies to control the labor mar- 
ket commonly assume. 

In the first place, it is not inconsistent with the general con- 
clusion arrived at that an advance of wages in certain depart- 
ments of industry should be effected by the action of Trades- 
Unions where this is accompanied by an equivalent fall in 
others ; and, supposing the workmen in such departments of 
industry had it in their power to exclude the competition of 
outsiders, it is quite possible that an advance of wages so ef- 
fected might be permanently maintained. Such a result is not 
only a perfectly possible achievement, but one which has oc- 
casionally been accomplished.* It amounts, however, merely 

* According to Mr. Thornton, this has hitherto been the nature of all Trades- 
Union victories, and must be so until Unionism becomes universal. "In a coun- 
try commercially stationary — in which national wealth is not increasing — when a 
permanent advance of the rate of wages is obtained artificially by Unionist action, 
there must needs be a corresponding lowering of wages in other trades. Even in 
a country commercially progressive, it is impossible for Unionism to raise wages 
in any particular trade without causing the demand for the produce of other trades 
to be less than it would have beeii, or without equally checking the demand for 
labor in those other trades. Whether a country be stationary or progressive, an 
exceptionally high rate of wages can not be maintained in any particular trade, 
unless the workmen of all other trades are prevented from entering that particular 
trade, and endeavoring to get the same rate. Unionism can not keep up the rate 
in one trade without keeping it down in others. It can not benefit one portion of 



220 IBADES-UmONISM.—I. 

to a change in the distribution of the Wages-fund, while its 
aggregate quantity is left unaltered; and for the present it 
will be more convenient to confine the discussion to the power 
of Trades-Unionism in relation to the general fund — its power, 
that is to say, to effect an advance of wages by a positive in- 
crease of capital, and not simply by drawing off capital from 
fields in which it was already invested, at the cost of the la- 
borers in those fields. 

Confining our view, then, for the present to this aspect of 
the case, we have now to consider — Trades-Unionism being, as 
we have seen, powerless to effect a permanent increase in the 
average rate of wages beyond what the economic conditions 
of the country permit — how far it is capable of modifying the 
rateToralirae, or of accelerating an advance rendered possible 
by the state of trade and industry, but still pending and un- 
realized. 

It is obvious at once, even apart from experience, that, 
where workmen have the power of combining, it will always 
be possible for them, by taking advantage of particular exi- 
gencies, to compel their employers to a temporary advance of 
wages. For example, where employers have bound them- 



the laboring population without, during a period of stagnation, injuring the re- 
mainder, nor even in a season of prosperity, without at least shutting out the 
bulk of the laboring population from the advantages secured for a portion." 
("On Labor," p. 310.) 

I confess I am quite unable to reconcile the drift of this passage with Mr. 
Thornton's denial of the existence of a determinate Wages-fund ; but, not to dwell 
upon this, it appears to me that the inference drawn from the state of things he 
describes, namely, that as Unionism is extended its advantages will be proportion- 
ally enlarged, until finally, becoming universal, they will represent pure gain un- 
qualified by any set-off", is exactly the i-everse of what the facts warrant. An ad- 
vantage which depends upon the exclusion of others can not but be impaired by 
the admission of any of the excluded, and can not but be wholly lost by the ad- 
mission of all. But I have dealt with this point more fully in a later chapter, 
post pp. 246-248. 



PROVINCE FOR ITS ACTION. 221 

selves under penalties to execute certain definite work within 
specified limits of time, it is evidently possible for workmen, 
by combination, to place their employers in the alternative of 
either complying with their demands or of incurring a greater 
loss; and under such circumstances a strike, it may be as- 
sumed, will be successful, so far as the immediate aims of the 
workmen are concerned. This, if an extreme case, is in actual 
life a very common one ; and the principle on which the suc- 
cess of the workmen depends has a much wider range than 
that of time contracts. To a certain extent all persons who 
embark their means in business are at the mercy of those on 
whose co-operation they rely for carrying their plans into ef- 
fect; and this liability to be injured by refusal on the part of 
others to co-operate will evidently become greater in propor- 
tion as the preliminary outlay incident to the undertaking is 
large. A capitalist, for example, who has committed himself 
to an industrial enterprise by making large purchases of build- 
ing and plant, wherewith to carry it on, must find laborers to 
work for him, or suffer heavy loss ; for either, his capital ly- 
ing idle, he loses the interest it might bring him, or, if he at- 
tempts by sale or otherwise to convert it into other forms, it is 
pretty sure to be largely depreciated in the process. Under 
these circumstances, supposing the workmen on whom he re- 
lies to strike for higher wages, and that he has reason to be- 
lieve that they possess the resolution and are in command of 
funds sufficient to enable them to maintain a prolonged strike, 
it may be his wisdom to concede their demands, even though 
the result should be not merely to bring his profits below the 
minimum, but to annihilate them altogether, or even convert 
them into loss ; since the entire cessation of his business for so 
long a period might involve him in still greater loss. It is evi- 
dent, therefore, that workmen have, by means of combination 
and by accumulating sufficient funds, very considerable power 
of acting upon the rate of wages. But the question remains as 



222 TRADES-UNIONISM.— I. 

to the ultimate consequences of such action ; as to its effect upon 
the workman's well-being, taking an extended view of his in- 
terest. To determine this point, we must consider two distinct 
states of industry and trade — one where the business of the coun- 
try is in its normal or average condition, and where consequent- 
ly, in old countries like Great Britain, the rate of profit is at or 
close upon the minimum ; the other, where trade is exception- 
ally prosperous, and profits may be assumed to be considera- 
bly in advance of the minimum rate. Taking the former case 
first, what will be the definitive result under those circum- 
stances of a successful strike for higher wages ? The rate of 
profit having been previously at or near the lowest point at 
which there is an adequate inducement to invest capital, the 
action of the workmen has forced it below this point. As has 
already been intimated, capital can not, except at great loss, 
be withdrawn suddenly from industries in which it has once 
been embarked, and therefore workmen may for a time enjoy 
the fruits of their success. But though capital can not be with- 
drawn suddenly, it may be withdrawn by degrees — at the 
worst by the simple process of not renewing it as it is worn 
out. And this is what, in the case we are considering, we may 
confidently assume would happen. Employers whose capital 

r is bringing them a rate of profit below what (allowance made 
for risk and other drawbacks) they might obtain from its in- 
vestment in other industries or in other places, will seize ev- 
ery opportunity that offers for withdrawing it from an employ- 
ment so unremunerative. After a little the successful work- 
men will find that their services are not required, and will be 
compelled for their support to throw themselves on the general 
labor market. The inevitable result must be a fall in the gen- 
eral rate of wages at least to its former level — to a level, that 
is to say, which is consistent with giving to capitalists what 

I they conceive to be an adequate return upon their outlay. 
This is the least unfavorable consequence which could ensue 



PROVINCE FOR ITS ACTION. 223 

from the success of a compulsory action on wages where the 
condition of trade js what we may describe as quiescent. Sup- 
posing, however, that proceedings of this kind were not mere- 
ly isolated and exceptional, but became sufficiently frequent to 
be looked forward to by capitalists as a normal incident of pro- 
ductive investment, the consequences for workmen would be 
much more serious than a mere return to the former state of 
things. The constant liability to a sudden reduction of profits 
from such causes would become an element in the regular cal- 
culation of capitalists, and before embarking in an industrial 
undertaking they would look for compensation in a rate of 
profit high enough to cover such risks. In other words, the 
action of Trades-Unions in forcing up wages under the circum- 
stances in question, however it might for the moment raise 
wages at the expense of profits, would have for permanent con- 
sequence precisely the opposite result; for, by increasing the 
risks of investment, it would tend to raise the minimum rate 
of profit, and, in proportion as it did so, to narrow the field 
for the employment of capital in the country. The aggregate 
capital being less, the Wages -fund, cceteris paribus, would be 
less, and unless laborers consented to reduce their numbers, 
the general rate of wages would fall. 

Such, it seems to me, must be the inevitable consequence of 
frequent and systematic attempts to force up the rate of wages 
when the economic conditions of ihe country do not war- 
rant a rise; and a fortiori, I may add, these disastrous results 
would be only more certainly realized, if this policy were at- 
tempted in a depressed condition of trade when profits barely 
reached the necessary level. But let us now consider how the 
case would stand supposing the demand for an advance to oc- 
cur when trade is exceptionally prosperous. Mechanical in- 
ventions, we may suppose, or improved processes, have cheap- 
ened production ; or the opening of new markets for trade has 
enabled our manufacturers to exchange their commodities on 



224 TRADES -UNIONISM.— I. 

better terms with foreign countries. Under such circum- 
stances profits may advance considerably above the minimum ; 
and the question arises, what is the scope for Trades-Union ac- 
tion offered by a contingency of this kind. We have already 
seen that, even under the ordinary conditions of trade, it is 
frequently in the power of workmen, by skillfully taking ad- 
vantage of the position of their employers, to force up wages 
above the actual rate. But a state of trade in which profits 
were sensibly above the minimum limit would obviously be 
highly favorable for such operations. For, by refusing to 
work, the men could now not merely inflict the same loss as 
before on their masters, but could compel them to forego the 
opportunities of reaping the unusual gains which the time of- 
fered. There can be no doubt at all, therefore, that under such 
circumstances well-concerted Trades -Union action would be 
capable of achieving success. This, however, does not in itself 

I establish the wisdom of such policy; for the question would 
remain, whether the game were worth the candle; whether 
the results attainable by this course would compensate for the 

I trouble and risk involved in the movement. For it must be 
remembered that, under the influence of the ordinary motives 
which, we have seen, govern the growth of capital, the state of 
things we are considering would act as a powerful incentive to 
accumulation and investment. An increased demand for labor 
would sooner or later spring up, and ultimately an advance of 
wages to as high a point as the actual state of things permitted. 
This being so, it may be asked whether the action of Trades- 
Unions, mischievous in the case we last considered, would not 
here be superfluous. Now the answer to this question must, I 
think, be in the negative. The workman, no doubt, is interest- 
ed in the final result, but he is also interested in its speedy re- 
alization ; and the process by which the fruits of exceptionally 
prosperous trade issue in an advance of wages is a circuitous 
one, and generally covers some considerable period of time. 



PROVINCE FOB ITS ACTION. 225 

Employers as a class, we may take for granted, will not propose 
an advance of wages except under the stress of competition, and 
before competition becomes actually operative the new capital 
may lie for some time upon the market, in the "floating" con- 
dition, seeking investment, but not at once finding it. Even 
after investment has been found, preliminary arrangements 
have to be made, and a considerable time may elapse before 
the new demand for labor is practically felt. Throughout this 
period wages, in the absence of external pressure, may remain 
absolutely unaffected, and laborers may be excluded from all 
share in the prosperity of which the entire fruits are appro- 
priated by their employers. If, then, laborers have the power, 
as we have seen they have, of shortening or of annihilating al- 
together this interval, why may they not use it? It seems to | 
me that there is here a perfectly legitimate field for Trades- 
Union action. The state of trade being such as to permit an 
advance of wages. Trades- Unionism, using its powers judi- 
ciously, may determine capital at once toward those issues 
which, under the influence of the ordinary motives governing 
industrial investment, it would indeed in any case ultimately 
reach. A distinct and substantial gain may thus be secured 
for labor without encroaching on the indispensable margin for 
the remuneration of capital, and without impairing any of thos6 

conditions on which its own permanent well-being depends.* 1 

It results from the foregoing considerations that the action 
of Trades-Unions, directed toward raising the rate of wages by 
combination among workmen, may be hurtful or beneficial ac- 
cording to circumstances. The practical utility, therefore, of 
this mode of action will depend upon the ability of those who 
control the conduct of these bodies to discriminate the states of 



* The history of the Newcastle engineering strike is instructive. It was in that 
case admitted, on the side of the masters, that the conditions of trade from the 
beginning permitted an advance of wages ; yet no advance was proposed till the 
pressure of Trades-Unionism was brought to bear. 

15 



/M.v, 



226 TBADES-UNIONISM.—I. 

the market in which action may be taken with advantage from 
those in v^hich it can only be productive of harm. It thus 
becomes matter of deep interest to know if the working-class 
leaders possess this ability or may be expected to acquire it. 

And here I touch a point on which I should not be justified 
in speaking otherwise than with extreme diffi.dence. I fear it 
must be admitted that, up to the present, the competency of 
Trades-Union leaders to form a correct judgment on the state 
of trade, even in the particular departments with which they 
each happen to be practically conversant, and to decide upon 
the seasonableness of a demand for increased wages, must be 
considered as at least problematical. The temporary success 
of a strike does not necessarily prove its wisdom ; but the fail- 
ure of a strike, immediate or ultimate, is decisive evidence that 
it ought never to have been undertaken ; and hitherto unsuc- 
cessful strikes have been extremely numerous. 

" The most protracted strikes (says Mr. Brassey) in wMcli the working- 
men have been engaged have generally taken place, not for the purpose 
of securing an advance of wages, but for the purpose of resisting a fall. 
Resistance to a proposed reduction was the canse of the engineers' strike 
in 1852 ; of the strike at Preston in 1853 ; of the strike in the iron trade 
in 1865 ; and of the strike of the colliers at Wigan in 1868. In each of 
these cases the masters had found it necessary, in consequence of the de- 
pressed state of trade, to reduce the rate of wages ; but the men, ignor- 
ing the circumstances of the trade, and looking only to what they be- 
lieved to be a degradation of their position as workmen, refused to ac- 
cept the reduction. They therefore vpent out on strike ; but, after a pro- 
tracted struggle, were compelled to accept the original proposal of their 
employers The leaders in several protracted strikes have exhib- 
ited a melancholy ignorance of the state of their own trade, and even of 
the market value of the goods in the production of which they are en- 
gaged. How much suffering might have been spared to the working- 
classes, if they had but known, before they engaged in a hopeless strug- 
gle, the true merits of their case ! I was once present at a meeting of 
employers during a large strike in the coal trade. I had the means of 
knowing that the wages which had been offered were the highest which 



PROVINCE FOB ITS ACTION. 227 

the employers could afford to pay, and that the markets were so over- 
stocked that it was a positive advantage to suspend the working of the 
pits for a time. But the facts which I had the means of knowing were 
apparently unknown to the miners ; and it was indeed lamentable to see 
the hard-earned accumulations of many years exhausted in an obstinate 
resistance to a reduction of wage, which had not been proposed by the 
emi^Ioyers until it had been forced upon them by the unfavorable condi- 
tion of their trade."* 

Nevertheless, I think there is evidence to show that Union- 
ists are gathering wisdom with experience, and this Mr. Bras- 
sey admits. The great majority of recent strikes have been 
successful. But it is not so much the success of recent strikes, 
as the manner in which the success has been achieved — the 
moderation and good sense with which for the most part the 
demands of the men have been put forward and supported, 
and the increasins; indications in their various manifestoes of a 
growing comprehension of the true conditions of the problem 
— that constitutes the most solid ground of hope. I would 
point in particular to the Newcastle engineers' strike of the 
year 1871 as an occasion when these qualities were manifested 
in an eminent degree. Certainly, to my apprehension as a dis- 
interested spectator, the conduct of the men in that struggle 
contrasted favorably with that of their employers. But in or- 
der to convert Trades-Unionism into an agency, not merely 
capable now and then of achieving an advance of wages by a 
coup de mam, while on other occasions it leads its supporters 
into ruinous contests, from which they only emerge enfeebled 
and impoverished, to accept worse terms than they had pre- 
viously refused — in order to convert it into an agency perma- 
nently and constantly beneficent, workmen must learn to rec- 
ognize more distinctly than they have yet done the essential 
x;onditions of success ; and not merely this, but also to adopt 

* " Work and Wages," pp. 6, 7, and 10, 11. 



g28 TRADES-UNIONISM.— I. 



k 



the needful means for determining in each case as it arises 
how far these conditions are fulfilled. In other words, Trades- 
^ Unions must frankly recognize the impossibility of forcing 
\ profits permanently below that rate which capitalists jegard, 
\ and show by their conduct that jhey regard, as only an ade- 
quate return upon their outlay; and they must organize the 
means for obtaining sufficient and trustworthy information re- 
specting the actual state of trade, with a view to determine 
whether profits are or are not in advance of this minimum 
level. It has been said, indeed, that workmen can not know 
the state of profits in a trade so long as they are excluded from 
access to their employers' books, and that this is a privilege 
which will never be conceded them. But for the purposes of 
Trades-Unionism I can not see that any such detailed knowl- 
edge as might be obtained by inspection of tlie books of em- 
ployers is necessar3^ The object in view is not to know the 
precise gains of particular employers, which may depend quite 
as much upon individual skill and management as upon the 
general circumstances of the trade, but whether the circum- 
stances of the trade, as a whole, are such as, with average man- 
agement, to admit of more than the usual gains. The data for 
this lie in a knowledge of the state of prices, at difi'erent pe- 
riods, alike of the finished article and of the raw material, of 
the conditions of production as regards mechanical, chemical, 
or other facilities, and of the greater or less accessibility of 
markets. These are circumstances an adequate knowledge 
of which is quite within reach of Trades-Unions, if only the 
proper means be taken to obtain it; and Mr. Brassey in the 
following passage gives an example of what these means 
should be : 

*' It is not the less essential to keep a watchful eye on all that is taking 
place abroad. The organization of Trades-Unions might be utilized for 
this important purpose. The resources of a joint purse should afford the 
means of sending delegates abroad, for whom opportunities ought to be 



PROVINCE FOR ITS ACTIOX. 229 

provided of studying foreign languages, and whose duty it should be to 
keep the artisans of England closely informed of the fluctuations in the 
activity of trade and the reward of labor in the countries in Avhicli they 
resided. Trades-Unions can not in the long run materially influence the 
rate of wages, but there are many valuable services which they can ren- 
der ; and none would be more practically useful than the frequent publi- 
cation of faithful reports on the state of the labor market from well-jjlaccd 
observers on the Continent."* 

I believe the influence of Trade-Unionism organized thus 
with a deliberate purpose of collecting and diffusing sound in- 
formation among its supporters would be in more ways than 
one largely beneficial. The collection of the necessary facts, 
their careful study and examination, and the discussions to 
which these would lead, combined with the sense of responsi- 
bility attaching to the formation of opinions on which practical 
issues of the gravest import depended, would in themselves be 
for workmen a means of practical education of the highest val- 
ue. But the more obvious advantages of this course of action 
would lie in its direct consequences — in the immense saving 
which would result both to men and masters in preventing 
abortive strikes. Indeed the adoption of such a policy by 
Trades - Unions would powerfully tend to the cessation of 
strikes altogether — at least for the purpose of effecting an ad- 
vance of wages — by rendering them unnecessary. It is not 
probable that, when employers came to understand that work- 
men had mastered the real facts of the situation and knew the 
strength and weakness of their reciprocal positions, the refusal 
of reasonable demands would be long persisted in. Each side 
would perceive that both alike were cognizant of what the cir- 
cumstances of the case permitted, of what was feasible, and of 
what was not so ; and neither would probably seek to strain its 
pretensions beyond the limit thus mutually recognized. 

* "Work and Wages," pp. 14, 15. 



230 TRADES-UNIONISM.— I. 

§ 4. The foregoing conclusions as to the power of combina- 
tions of workmen to effect an advance in the rate of wages may 
seem to be applicable only to old countries, in which, like our 
own, the rate of profit is normally at or close upon the mini- 
mum point, and from which, consequently, capital is from time 
to time flowing off" into foreign investment. In countries like 
the United States, in which the rate of profit is still far above 
the minimum, and which, instead of lending capital to foreign 
countries, are themselves habitual recipients of their redundant 
supplies, it will perhaps be thought that the arguments which 
have been used would cease to have any force. It can not be 
denied that the same obstacles which set limits to Trades-Union 
action in the Old World do not exist in the New. Never- 
theless, I apprehend that though the obstacles may not be the 
same, the limitations on such action will be found in effect to 
be scarcely less real there than with us. If, indeed, capitalists 
could be reduced to the alternative of either conceding the de- 
mands of Trades-Unions, or being deprived altogether of the 
opportunity of investing their wealth, one can imagine that, 
rather than accept the latter course, they might consent to so 
great an advance of wages as would, under the actual condi- 
tions of productive industry, issue in a decline of the returns 
on capital considerably below the level at which profits in the 
United States now ordinarily stand ; and it is possible that the 
change in distribution thus effected might be permanent. I 
say this would be a conceivable result, if capitalists could be 
reduced to the alternative just stated. But in a country of 
such vast magnitude as the United States, covering as it does 
the greater portion of a continent, what grounds are there for 
believing that Trades-Union organization can ever become at 
once so complete and so all-embracing as to be capable of pre- 
scribing terms such as these ? For my part, I find it impossible 
to contemplate such a consummation as a condition of things to 
be taken into serious account. Within a limited area — with- 



IN NE W CO UNTRIES. 231 

in perhaps a single State — one can imagine Trades-Unionism 
absolute ; but, limited to a single State, or even to half a dozen 
States, the attempt to enforce its decrees in the sense described 
would issue, not in raising the rate of wages generally over the 
American continent, or even in raising it permanently within 
the State or States in which the organization was dominant, 
but simply in driving capital from one State to another — in 
sending it from New England or New York to Illinois, Mis- 
souri, or California; and workmen would find their prize es- 
caping them just as they fancied they had grasped it. In this 
way, in the New World no less than in the Old, the larger aims 
of Trades-Unionism must, as I apprehend, find defeat. Under 
all circumstances the facilities of escape open to capital are too 
great to make it possible to hem it in, and so to compel a sur- 
render at discretion ; and we shall have no need to modify the 
conclusions at which we have arrived even in applying them 
to a country in its economical circumstances and development 
so widely separated from our own as the United States. 

§ 5. As the reader has seen, the utmost power which I am 
disposed to concede to Trades-Unions over wages, where they 
seek their ends by compelling a positive increase of investment, 
is that of accelerating an advance, already, so to speak, in the 
air, and which would come in the end without their interven- 
tion. Where strikes have been permanently successful, where 
they have not merely gained to-day what has been lost to-mor- 
row, but have issued in a permanently improved condition of 
the workmen, I believe the explanjition of their success will 
always be found in a state of trade exceptionally prosperous 
which would in any case before long have attracted an increase 
of capital, and resulted in an enlarged demand for labor. But 
this explanation of the success of strikes is, I find, strenuously 
repudiated by Mr. Thornton, who regards Trades-Unionism as 
an agency capable not merely of raising wages in anticipation 



232 TBADES-UmONISM.—I. 

of the ordinary commercial influences, but of permanently sus- 
taining them at a level higher than they would without its ac- 
tion ever have attained, and in conformity with this view is 
disposed to attribute the advance of wages which within twenty 
years has occurred in most branches of industry to Trades-Un- 
ion action as its proper cause. I confess Mr. Thornton's ar- 
gument on this point is to me singularly unsatisfactory. He 
writes : 

" Of course it is open to any one to question whether the enhancement 
of labor's remuneration which has thus been going on at both ends is 
due to the influence of Trades-Unions, and whether it would not have 
taken place equally if the price of labor had been left to find its own 
level without extraneous interference. The questioner here, however, 
may very properly be left to answer himself, as he may satisfactorily do, 
by proceeding to inquire how often any portion of the enhancement re- 
ferred to has been volunteered by the masters, and how often it has been 
only yielded to solicitation with force in the background. He will find 
the instances of masters spontaneously raising wages to be about as nu- 
merous as those of workmen conscientiously believing themselves to be 
overpaid and coming forward to insist that their wages should be re- 
duced."* 

Mr. Thornton apparently is unable to conceive a middle 
term between "volunteering" an advance, and "yielding to 
solicitation with force in the background ;" as if it were not 
the essence of his opponent's case that there is this middle 
term — to be found in those economic influences distinct alike 
from mere benevolence and from coercion from without, which 
issue in increased competition for labor, and as a consequence 
an advance in its price. I commend to Mr. Thornton the fol- 
lowing facts supplied by Mr. Brassey : 

" In the famous engine-building establishment at Creuzot, founded by 
the father of Mr. Charles Manby, 10,000 persons are now employed, and 
the annual expenditure in wages amounts to £400,000. Mechanics were 

* "On Labor," pp. 257, 258. 



CAPITALISTS IN COMBINATION. 233 

paid, -vvlien the establisliment was first created, at the rate of 2i- francs a 
day. At the present time none receive less than 5 francs a day. Be- 
tween 1850 and 1866 the mean rate advanced from 2s. to 2s. l\d. per head, 
or thirty-eight per cent., and some men earned from 6s. 8^. to 8s. M. per 

day Compare what lias occurred in this country with what has 

taken place at MM. Schneider's at Creuzot At M3I. Schneider's, 

without the assistance of a Trades- TJnion^ the working-people have obtain- 
ed, during the last seventeen years, an augmentation of wage of thirty- 
eight per cent. In England, in the corresponding period, the most pow- 
erful of all the Trade Societies, with an accumulated fund of £149,000, 
has found it impossible to secure any increase in the earnings of its mem- 
bers."* 

How will Mr. Thornton explain the advance of wages at 
Creuzot? Trades-Union pressure not being there, will he refer 
it to the spontaneous benevolence of the iron-masters ? A lit- 
tle reflection will probably suggest to him a means of escape 
from his own dilemma. 

§ 6. The power of workmen to compel by combination an 
advance of wages has generally been considered as more or 
less an open question; but that capitalists possess the corre- 
sponding power of keeping wages down by combination has, 
for the most part, been taken for granted. In a well-known 
passage Adam Smith observes that employers are in a perma- 
nent conspiracy to keep wages down, and the context certainly 
implies the writer's belief that they are generally successful in 
this object, Nevertheless I must venture to question the as- 
sumption, even though supported by Adam Smith's authority. 
I hold that, at least in countries in which the industrial and 
commercial spirit is strong, the power of capitalists by com- 
bination to depress wages or to keep them down is not a whit 
more real than that of workmen by similar means to force 
them up. Either may, no doubt, effect their object for a time, 

* "Work and Wages," pp. 159-161. 



UU TRADES-UNIONISM.— 1. 

but neither, as I believe, can be permanently successful. The 
grounds of this opinion will be apparent to those who have 
followed the argument by which in a former chapter I have 
endeavored to prove the " determination " toward the Wages- 
fund of a certain portion of the national wealth.* It is quite 
true, no doubt, that capitalists, as possessors of wealth, have 
both the physical and the legal power of employing it as they 
please. They may, if they choose, withdraw all their capital 
from investment and squander it in unproductive consumption, 
or, for that matter, sink it in the sea ; and the effect of such 
proceeding on their part, if this course were extensively adopt- 
ed, would undoubtedly be to depress wages in the country for 
a considerable period of time. But I apprehend the real ques- 
tion is, not whether capitalists have the physical or legal power 
of doing such things, but whether, their character being such 
as it is, it is morally possible for them to adopt these or any 
other effectual expedients for accomplishing the object the}'' no 
doubt much desire. The whole issue, as I conceive it, turns 
upon the character of capitalists as a class, and more particu- 
larly on the balance within them of two qualities of mind — on 
the one hand, the strength of the accumulative propensity, and, 
on the other, the taste for luxurious enjoyment, by which the 
former isconstantly counteracted. Supposing these two quali- 
ties to be so adjusted in the owners of wealth in this country 
that the prospect of a certain rate of profit, say ten per cent., 
suffices to cause a certain proportion of the whole national 
wealth to be turned toward productive investment, this propor- 
tion will be turned to this destination. It is true, indeed, that 
those who thus employ their wealth would be very glad to ob- 
tain from it a larger return than they are likely to receive, and 
not a few would be only too ready, if they had the power, to 
force down the rate of wages with this view. But this is pre- 

Ante, pp. 184-187. 



CAPITALISTS IN COMBINATION. 235 

cisely what they can not do consistently with gratifying the 
dominant propensity which, under the temptation of a cer- 
tain rate of profit, draws them toward productive investment. 
Thus, supposing a group of employers to have succeeded, as 
no doubt would be perfectly possible for them, in temporarily 
forcing down wages by combination in a particular trade, a 
portion of their wealth, previously invested, would now be- 
come free — how would it be employed? I have already 
traced the consequences of such an occurrence, and need not 
weary the reader by repeating the deduction here. Suffice it 
that, though it is impossible to say what might be the course 
adopted in particular instances — unless we are to suppose the 
character of a large section of a community to be suddenly 
changed in a leading attribute, the wealth so withdrawn from 
wages would, in the end, and before long, be restored to wages. 
The same motives which led to its investment would lead to 
its re-investment, and, once re-invested, the interests of those 
concerned would cause it to be distributed among the several 
elements of capital in the same proportions as before. In this 
way covetousness is held in check by covetousness, and the 
desire for aggrandizement sets limits to its own gratification. 
My conclusion is that, though combination, whether employed 
by capitalists or by laborers, may succeed in controlling for a 
time the price of labor, it is utterly powerless, in the hands of 
either, to effect a permanent alteration in the market rate of 
wages as determined by supply and demand. 

§ 7. Throughout the foregoing discussion it has been con- 
stantly assumed that an advance of wages involves as a con- 
sequence, cceteris paribus^ a fall of profits. I beg to call the 
reader's attention to the condition here presupposed ; for I 
observe, in some recent publications in which the relation of 
profits to wages is discussed, that there is an entire omission 
on the part of the writers to say whether, in challenging the 



236 TBADES-UmomSM.—L 

doctrine just stated, they understand it as subject to, or irre- 
spective of, this qualification. Mr. Brassej, for example, de- 
votes a chapter to prove that " the cost of labor can not be 
determined by the rate of wages;" and this enunciation is 
characterized by Mr. Harrison in the Fortnightly Review as a 
" striking law of industry, which the book before us boldly 
formulates and completely proves," and he proceeds to con- 
trast it with the "professorial dicta of so-called economists, 
based on the assumption that high wages inevitably imply 
dear goods and low profits." That any one ever maintained 
that the cost of labor, prices, or profits were determined simply 
by the rate of wages irrespective of the efficiency of the labor, is 
what, I own, I find it hard to believe ; and until Mr. Harrison 
tells us who the economists are that maintain this enlightened 
view — as I have never myself happened to meet with a speci- 
men of the class either in the flesh or in print — I shall be dis- 
posed to regard them as mythical entities evolved from the 
moral consciousness of writers more anxious to refute than to 
understand Political Economy. On the other hand, I find it 
almost equally difficult to suppose that either Mr. Brassey or 
Mr. Harrison would advisedly maintain, on the assumption that 
the efficiency of labor is a constant condition, that the cost of labor, 
and, as depending on it, the rate of profit, are not determined 
by the rate of wages. In truth, it is pretty clear that the en- 
tire controversy on this subject has arisen from some people 
not taking the. trouble to understand what other people say. 
Eicardo, for example, has laid it down that profits are inverse- 
ly as wages, but any tolerably careful student of Eicardo 
would see that by wages he meant "proportional wages" — 
that is to say, the laborer's share of the product, or, if wages in 
the ordinary sense, then that the statement was to be received 
subject to the condition that the efficiency of labor remained 
the same. Eicardo, however, has not been fortunate in finding 
careful students; and scores of writers who have undertaken 



PROFITS AND WAGES. 237 

to refute his doctrine have in reality refuted merely their own 
misconception of it. And what in effect is this "striking law 
of industry," now for the first time, according to Mr. Harrison, 
"boldly formulated and completely proved," and which puts 
to shame "the professorial dicta of so-called economists?" 
Why simply this, that it often pays better to employ a good 
workman at high wages than an inferior one at low. The fact 
is indubitable, but why it should be called " a striking law of 
industry " rather than the most common of industrial common- 
places, still more why it should be represented as a conclusive 
refutation of all that economists have written on the relation 
of wages to profits, is what I must confess myself wholly at a 
loss to discover. 

It is possible, indeed, that the language I have quoted may 
refer, not to the perfectly sound though somewhat trite max- 
im, that efficient labor is often worth more than inefficient, 
but to a doctrine suggested, rather than " boldly formulated," 
in the chapter under consideration. In a passage headed 
" Uniform Cost of Labor," Mr. Brassey writes as follows : 
"High wages do not necessarily imply dear labor, just as, on 
the other hand, low wages do not, of necessity, make labor 
cheap. On my father's extensive contracts, carried on in al- 
most every country of the civilized world and in every quarter 
of the globe, the daily wage of the laborer was fixed at widely 
different rates ; but it was found to be the almost invariable 
rule that the cost of labor was the same — that for the same 
sum of money the same amount of work was everywhere per- 
formed. Superior skill, extra diligence, and a larger devel- 
opment of physical power, will often compensate the employer 
who finds himself obliged to pay higher wages than his com- 
petitors."* 

Let me here say that I have not the slightest disposition to 

* "Work and Wages," pp. 74, 76. 



238 TRADES-UNIONISM.— I. 

question the fact of a real connection existing between good 
wages and efficient work, and still less would I dispute the 
probability (to refer here to a later position of Mr, Brassej's) 
that shortened hours of work maj up to a certain point find 
their compensation in the increased energy of the workman. 
As corroborative of these assumptions, I regard the statement 
of Mr. Brassey's experience furnished in this work as extreme- 
ly valuable. But the reader will observe that there is some- 
thing more in the passage just quoted than a mere statement 
of specific fact. The words " it was found to be an almost in- 
variable rule that the cost of labor was the same — that for the 
same sum of money the same amount of work was everywhere 
performed," coming under the heading " Uniform Cost of La- 
bor," seem to point to the existence of an economic law accord- 
ing to which the efficiency of labor, all the world over, varies 
•with its price. An economic law, indeed, there is which con- 
nects efficiency of work with payment, but, as I have else- 
where shown, this operates only within the limits of competi- 
tion.* Within such limits the tendency very obviously will 
be to adjust wages in each occupation to efficiency in that oc- 
cupation, and thus to bring out as the result a uniform cost of 
labor, or, as I prefer to call it, price of work. But Mr. Bras- 
sey goes far beyond this, and lays down the rule of uniform 
cost of labor as " almost invariable in every country of the civ- 
ilized world and in every quarter of the globe." This, indeed, 
would have been a "striking law of industry," had our author 
made the position good; but it is singularly disappointing to 
discover, ere we read many pages on, that the so-called law 
can only be regarded as a rhetorical expression. At page 84 
we find that it must be understood as referring to " railway 
work executed by unskilled labor," while, even as thus lim- 
ited, it is far from being universally true, failing, as Mr. Bras- 

* See ante, p. 77, note. 



COST OF LABOR. 239 

sey informs us it does, in the comparison of English labor with 
the labor of India and of Italy (pp. 87, 90), and, as statistics 
given elsewhere in the volume show (pp. 38 and 49), in other 
instances also. That the rule does not hold of the skilled la- 
bor of different countries is what is implied in nearly every 
other page of Mr. Brassey's book; the constant moral there 
enforced being the heavy detriment which Great Britain suf- 
fers from her dear labor — a detriment so heavy, an economical 
drawback so serious, that only her great resources in other re- 
spects enable her to bear up under it against the strain of con- 
tinental competition. 

What, then, is the net outcome from Mr. Brassey's facts in 
their bearing upon the question as to the connection between 
wages and the cost of labor or price of work? A large por- 
tion of those facts relate to the wages of laborers in Great 
Britain in free competition with each other; and so far his 
statements form a striking and useful illustration of a familiar 
principle — the tendency of competition, within any given de- 
partment of industry, to adjust payment to efficiency, so as to 
render the price of a given piece of work pretty nearly the 
same whether it is performed by labor of superior or of only 
moderate and ordinary skill. But where his examples are of 
broader scope, and exhibit the relative rates of wages in dif- 
ferent countries and in labor markets not in free competition 
with each other, their value in relation to the question in hand 
is of a different kind. What they amount to would seem to 
be this: in the comparison of different countries, a very low 
rate of remuneration for labor is generally found to be accom- 
panied with a very low degree of industrial efficiency, while, 
as the condition of the laborer improves, his efficiency up to a 
certain point is found to increase in nearly the same degree. 
I say "up to a certain point;" for it does not appear that 
the correspondence between remuneration and efficiency holds 
good beyond the range of those employments which call for 



240 TBADES-TJNIONISM.—I. 

mere physical energy and endurance, such as railway work 
performed by unskilled labor; nor is it found to be universal- 
ly true even within these limits. When we pass from the 
ranks of unskilled to those of skilled labor, and when in the 
latter we confine our attention to those cases in which the re- 
muneration has risen above the point at which it still contrib- 
utes to mere physical energy, we find no evidence in the facts 
adduced by Mr. Brassey of the existence of a uniform cost of 
labor in dififerent countries. On the contrary, the main tenor 
of his work goes to establish the opposite position ; since, as 
I have already remarked, the constant moral deduced from his 
reasonings is the heavy disadvantage which England under- 
goes from her dear labor in comparison with the cheap labor 
of the Continent — a disadvantage so great as only, according 
to Mr. Brassey, to be just compensated by her superior re- 
sources in machinery, raw material, and coal. It follows most 
clearly from this that, in Mr. Brassey's opinion, that portion 
of English work which is performed by labor is more highly 
paid for here than abroad. And in truth we have only to 
consider the habits of the great majority of our artisan popu- 
lation to perceive how very slight the connection can, in the 
nature of things, be between efficient labor in those classes and 
the rate of their remuneration. An increase of wages which 
merely results in an enlarged consumption of beer and spirits 
is not likely to add much either to the physical powers or to 
the intelligence and skill of the recipients; and notoriously 
this is the way in which an increase of wages is, for the most 
part, taken out in this country. I repeat once again, I have 
"no desire to dispute the existence of a real connection between 
good pay and efficient work; only let us note well the nature 
of the connection. It exists so far, and only so fiir, as the 
larger pay is applied to sustain the industrial qualities, phys- 
ical or mental, of the workman. At present it would seem 
that this is very generally the case while wages are no more 



HOW FAB UNIFORM. 241 

than sufficient to supply the primary animal wants. But 
where they exceed this limit, the increased pecuniary means 
placed at the laborer's disposal are quite as often employed to 
impair as to improve his industrial qualities, and the connec- 
tion between remuneration and efficiency is at an end, or at 
most is but a matter of accident. I am one of those, however, 
who live in hope that the rule may not always be thus limit- 
ed. When artisans shall learn to use their increasing re'-^ 
sources to help their intellectual and moral progress, instead of, 
as now, squandering them in brutalizing dissipation, and when 
improved education shall go hand in band with a larger com- 
mand over material well-being, we may hope to see an ap- J 
proximation toward that uniform cost of labor of which Mr. 
Brassey speaks, but of which, outside the lower grades of la- 
bor, the indications at present are, it is to be feared, somewhat 
partial and rare. 

So mucb for Mr. Brassey's facts. I fail to discover in them 
any new "law of industrial life" — indeed it is but right to 
say that Mr. Brassey disclaims for them any pretensions to this 
character — still less any thing in the least at variance with the 
well understood doctrines of Political Economy; but I find 
evidence, not always, as it seems to me, very accurately inter- 
preted, of which a good part is illustrative of a very familiar 
economic principle, and the rest supports the view of a con- 
nection pretty widely existing between wages and industrial 
efficiency in the lower ranks of labor. 

16 



CHAPTER IV. 

TRADES -UNIONISM.— 11. 

§ 1. The methods bj which Trades-Unions seek to operate 
on the rate of wages are numerous ; but they all find a place 
under one or other of the three following heads : 

1. Directly — by calling on employers to raise the rate of 
wages, or, what comes to the same thing, to reduce the num- 
ber of working hours, the rate of wages not being proportional- 
ly reduced — a demand which involves either increased invest- 
ment of capital in the form of wages ; or — unless so far as the 
reduction in working hours may be compensated by increased 
efficiency — a proportionally diminished production from the 
same investment, 

2. Indirectly — by regulations directed toward restricting the 
supply of labor. 

3. Indirectly — by regulations directed toward increasing 
the demand for labor by increasing the need for it ; or, as it is 
otherwise expressed, by increasing the quantity of work to be 
done. 

The first of these methods is that which has been considered 
in the last chapter ; and the reader has seen how far we found 
it to be efficacious and legitimate. The two remaining methods 
have now to be considered. 

§ 2. And first, as to that mode of action which seeks to at- 
tain its end by acting on the supply of labor. In order to form 



MODE OF ACTING ON SUPPLY. 243 

a sound judgment on this portion of Trades-Union policy, it is 
important to discriminate between two perfectly distinct meth- 
ods by which the supply of labor may be controlled. It may, 
in the first place, be controlled at its source by diminishing the 
number of people born to the calling of labor; and this is a 
result which Trades-Unions might in many ways promote — for 
example, by cultivating among the laboring classes a sounder 
public opinion on the subject of population than at present 
prevails, by impressing on parents their responsibility toward 
their offspring, and generally by encouraging prudence and 
foresight, which, once established as habits, would affect con- 
duct in relation to marriage and its consequences, as well as 
with regard to other aspects of life; and this influence might 
be brought to bear either upon the laboring population at large, 
or upon those sections of the population with which each 
Trades-Union happened to be immediately in contact. This is 
one method by which it may be attempted to operate on the 
labor market through the supply of labor. But the end in 
view may also be sought by another path, namely, by opposing 
artificial barriers to the admission of workmen to particular 
trades — for example, by regulations excluding from employ- 
ment in the protected trades all who have not been regularly 
apprenticed to them, setting limits at the same time to the num- 
ber of apprentices which each master-tradesman may receive ; 
the multiplication of the laboring people as a whole and of eacli 
portion of it being left to the influences which at present deter- 
mine it. Of these two methods of proceeding we may confi- 
dently pronounce the first to be both sound and legitimate — 
sound, because the means adopted are fitted to attain the end 
in view, and legitimate, because the course pursued would be 
free from all attempts at coercion, and would be addressed e.\,- 
clusively to the reason and conscience of those concerned. We 
have no occasion here, however, to enter into any further ex- 
amination of this mode of restricting the supply of labor, since 



244 TRADES-UNIONISM.— 11. 

it is not the method which Trades-Unions have adopted. Their 
action in this direction has been confined exclusively to that 
other mode of proceeding which consists in hedging round cer- 
tain favored trades with artificial obstacles ; and this according- 
ly is the mode of action we are now called upon to consider. 

And here it may at once be conceded that the policy in 
question is capable of being made effectual for accomplishing 
its immediate purpose — that of raising the rate of'wages in the 
regulated occupations above the level which in an open labor 
market it would attain ; but conceding this, the question still 
remains whether this mode of action is consistent with the best 
interests either of the laboring people as a whole, or even of 
that section of them in whose favor the restrictive regulations 
are imposed. To enable us to form a judgment upon this 
point, it is important to bear in mind the real nature of the 
monopoly created by the restrictive rule. That monopoly is 
not, as might at first be imagined, one in favor of certain natu- 
ral groups of population — the collection of families, namely, 
who suppl}^ candidates to the highly-paid trades — as opposed 
to the laboring population at large. It is a monopoly of a 
much narrower and more artificial sort than this. The line 
drawn is, not between such natural groups and the rest of the 
laboring people, but between certain selected members of such 
groups and all who are not included in the selection. Now 
this is an important distinction ; because if the purpose were 
to reserve certain occupations to certain groups of families, say 
to those who at present fill the occupations in question and 
their descendants — though such a course would amount to the 
creation of industrial castes, and would be open to all the ob- 
jections that apply to a caste system — still it would have one 
important merit: the end in view — the permanent elevation 
of wages in the favored occupations above the level prevailing 
in the country — would need for its attainment something more 
than the mere exclusion of competitors from other employ- 



MODE OF ACTING ON SUPPLY. 245 

ments : it would require, besides this, a control of population 
within the protected groups, and consequently could only be 
accomplished by the cultivation of feelings and habits socially 
so valuable that they might almost be thought to compensate 
for the serious evils inherent in every such plan. Such, how- 
ever, is not the object or character of the policy we are now 
considering. The thing aimed at is not the permanent eleva- 
tion of any natural groups of population, but simply the main- 
tenance of certain individuals who happen to be exercising 
certain callings in the enjoyment of a state of well-being not 
permitted to their fellows. Those, therefore, who charge upon 
Trades-Unions the purpose of creating industrial castes do not 
seem to have hit the precise weakness leavening the conduct 
they condemn. The scheme has, in truth, nothing in it so 
large or liberal as the social idea on which a caste system rests. 
It is conceived in a far narrower spirit, and is wholly incapa- 
ble of promoting any end that can properly be called social. 
Far from comprehending in its aims the general interests of 
labor, it is not even large enough to embrace those of a single 
laboring group, or even of the family in its narrowest sense; 
for, as Mr. Thornton tells us,* " a journeyman is not permitted 
to teach his own son his own trade, nor, if the lad managed to 
learn the trade by stealth, would he be permitted to practice it. 
A master, desiring out of charity to take as apprentice one of the 
eight destitute orphans of a widowed mother, has been told by 
his men that if he did they would strike. A brick-layer's as- 
sistant who by looking on has learned to lay bricks as well as 
his principal, is generally doomed, nevertheless, to continue a 
laborer for life. He will never rise to the rank of brick-layer, 
if those who have already attained that dignity can help it." 

The rule is thus a purely mechanical one, and operates 
wholly irrespective of any of the conditions on which indus- 

* "On Labor," p. 343. 



246 TRADES - UNIONISM.— 11. 

trial progress or human well-being depends. No attempt is 
made to control population within the protected trades, any 
more than outside them. ISTor are the privileges enjoyed con- 
nected with any qualification which might serve as an edu- 
cating influence for the people at large. On the contrary, the 
system presents to them the unedifying spectacle of a portion 
of their number enjoying exceptional advantages which they 
have done nothing to deserve, and which they obtain at the 
expense of others whose natural or moral claim is quite as 
good as theirs. It thus at once creates privileged classes, and 
does so in a manner which precludes even such partial advan- 
tages as might accrue from a regime of privilege. 

Mr. Thornton, indeed, has offered a plea for these restrictions 
which, if it could be made good, might go some way toward 
excusing them. He writes: "The only apology that can be 
offered to the many is, that without the sacrifices exacted from 
them the privileges enjoyed by the few could never be pre- 
served ; and that, moreover, the sacrifices may be only tempo- 
rary, for that the best chance the whole laboring population 
have of advancing is by each of its separate sections advancing 
separately, and that therefore each Trades-Union is best con- 
sulting the general good by attending in the first instance ex- 
clusively to its own." It must of course be admitted that the 
privileges enjoyed by the few under this scheme can only be 
preserved by imposing sacrifices on the many ; but Mr. Thorn- 
ton can scarcely have intended this as its justification, since 
precisely the same can be said for every monopoly that ever 
existed. The second portion of his plea, that the plan in ques- 
tion, though confined at present to a favored few, may be 
made instrumental for gradually elevating the whole laboring 
population, would be more to the purpose if the fact were as 
he assumes. But this is precisely what I must deny to be 
the case. The essential nature of the plan absolutely precludes 
the possibility of its being applied to any such enlarged pur- 



HOW FAR JUSTIFIABLE? 247 

pose. For on what does its efficacy depend? Let the reader 
observe that, as I have already pointed out, it makes no pro- 
vision for the control of population either within or without 
the protected trades ; and further, that, while it leaves popula- 
tion to proceed as the unchecked instincts of its members may 
determine, it fails equally to take any steps for making labor 
more productive: indeed, as I shall presently have occasion to 
point out, there are other portions of the Trades-Union regu- 
lations which tend directly to limit and even positively to re- 
duce the productive powers of industry. On what, then, does 
the efficacy of the arrangement depend? Simply and exclu- 
sively on the circumstance of the monopoly it creates — on the 
fact that those within the protected trades are few as compared 
with those who are outside them. Increase the numbers within 
the protected trades in relation to the outsiders, or, on the oth- 
er hand, diminish the number of outsiders in relation to those 
who are protected, and the virtue of the scheme evaporates, 
and wages inside and outside return to their natural level. 
The entire efficacy of the system thus depending upon the fact 
that it is partially applied, the extension of its privileges to 
the whole population w.ould be equivalent to their complete 
abrogation. Such a system, from its very nature, is incapable 
of the development claimed for it. At the utmost it can only 
do what it actually accomplishes — secure, that is to say, ex- 
ceptional advantages for a select few, the condition of their en- 
joyment being that the same advantages shall not be shared 
by the many. I grant it is not for the richer or more edu- 
cated classes to throw stones here at Trades-Unionists; and I 
have certainly no desire to do so. There is no class that has 
not shown itself, when opportunity offiarcd, quite capable of 
sacrificing the most important interests of the community to 
the aggrandizement, real or imaginary, of its own members ; 
and the working-classes are in this respect neither better nor 
worse than others. But if every anti-social regulation is to be 



Jf48 TRADES-UNIONISM.— 11. 

sanctioned and upheld among working-men which has ever 
obtained footing among those who are called their betters, the 
prospect of social advancement seems but small. Into these 
class questions, however, I have no wish to enter here. My 
purpose has been simply to ascertain the real character and 
bearing of this particular portion of Trades-Union rules; and 
this is the result to which I am led : I find it to be in its es- 
sential character a monopoly of the narrowest kind, capable 
indeed of accomplishing some small results in favor of a priv- 
ileged few, but wholly destitute of efficacy as an expedient for 
helping social improvement; a monopoly, moreover, founded 
on no principle either of moral desert or of industrial efficienc}'', 
but simply on chance or arbitrary selection, and which there- 
fore can not but exert a demoralizing influence on all who 
come within its scope ; in all its aspects presenting an ungra- 
cious contrast to all that is best and most generous in the spirit 
of modern democracy. 

" If," says Mr. Mill,* " no improvement were to be hoped for in the 
general circumstances of the working-classes, the success of a portion of 
them, however small, in keeping their wages by combination above the 
market rate, would be wholly a matter of satisfaction. But when the el- 
evation of the character and condition of the entire body has at last be- 
come a thing not beyond the reach of rational effort, it is time that the 
better paid classes of skilled artisans should seek their own advantage in 
common with, and not by the exclusion of, their fellow-laborers. While 
they continue to fix their hopes on hedging themselves in against com- 
petition, and protecting their own wages by shutting out others from ac- 
cess to their employment, nothing better can be expected from them than 
that total absence of any large and generous aims, that almost open dis- 
regard of all other objects than high wages and little work for their own 
small body, which were so deplorably evident in the proceedings and 
manifestoes of the Amalgamated Society of Engineers during their quar- 
rel with their employers. Success, even if attainable, in raising up a 
protected class of working-people, would now be a hinderance, instead 
of a help, to the emancipation of the working-classes at large." 

* "Principles of Political Economy," vol. ii., pp. 554, 555. 



''MAKING WORE." 249 

§ 8. There is yet anotber line of conduct by which Trades- 
Unions may and do seek to act upon the rate of wages— a 
course which is directed neither to augmenting the sum total 
of wealth applied to the payment of wages, nor yet to restrict- 
ing the supply of labor, but to enhancing the difficulties of 
production, and thereby increasing the quantity of work need- 
ed to be done — in a word, it seeks to raise wages by " making 
work." 

Now this portion of Trades- Union policy rests upon a view 
of the wages problem at once so plausible and so fallacious, 
and withal so pregnant with practical mischief, that I think it 
will be worth our while, before entering into the particular 
rules by which it is sought to carry it into effect, to consider 
briefly the theoretic principle underlying it ; and I am the 
more disposed to do so, because I find that those who favor 
this principle are by no means confined to the supporters of 
Trades-Unions. In point of fact, in the discussions which have 
lately taken place on the wages problem, the soundness of the 
view in question has been very generally taken for granted on 
both sides. In Mr, Thornton's work it is not merely taken for 
granted: the doctrine is deliberately put forward and formally 
defended as an indubitable principle of economic science. Mr. 
Thornton indeed, it is proper to say, while upholding the theo- 
ry, strongly denounces its practical application in the rules of 
Trades-Unions; but this logical inconsistency will not deprive 
his advocacy of the weight which naturally attaches to it ; and 
I shall therefore make no apology for examining the doctrine 
as I find it set forth and defended in his work. The character 
and scope of the principle to which I refer will appear from 
the following passages. 

At page 87 Mr. Thornton writes: 

" The quantity of labor which an employer needs depends upon the 
work he wants to have done. If there are certain jobs which it is essen- 
tial to him to get finished within a certain time, he will, if labor be dear. 



250 TRADES-UNIONISM.— 11. 

consent to pay pretty high for the quantity needed to complete the jobs 
within the time. But he will not, merely because labor happens to be 
cheap instead of dear, hire more than that quantity. If, on Saturday 
morning, he wants his hay cut or carried before night, and if fewer than 
ten men would not suffice, he will, perhaps, consent to give ten men 5s. 
apiece, but he would not engage twenty men for the same service, even 
if he could get them for Is. a head." 

Again, at page 103 : 

" This happens \i. e., the demand for labor is urgent] in new colonies, in 
which the extent of land to be tilled, and the number of sheep or oxen 
to be tended, and of meals to be cooked, and floors to be scrubbed, is 
generally out of all proportion to the number of available hinds and 
herds, cooks and house-maids." 

And lastly, I find this more decisive passage at page 339 : 

" I am myself unable to understand how mere labor-saving machineiy 
can possibly, if no counteracting cause intervene, fail to diminish the de- 
mand for labor. If, indeed, the machinery increased the productiveness 
of labor in a greater ratio than that in which it saved labor, its influence 
on employment would be dififerent. If, by using improved implements, 
one man were enabled not merely to do the work of two, but to turn out 
more produce than the two together had formerly done, the demand for 
labor might remain unabated, or might increase. If with only half the 
previous expenditure of labor two ears of wheat were made to grow 
where but one grew before, or twice as much iron-stone were brought 
to the pit's mouth, or twice as many herrings were caught, those men 
for whom there was no longer place in the corn-field, or in the mine, or 
on the fishing-ground, might yet find full employment in making the 
additional wheat into bread, or in smelting the additional ore, or in 
curing and packing the additional fish. But if there be no more corn, 
and no more ore, and no more fish than usual, if the new machinery has 
created no new work, and has only enabled the old work to be done 
with fewer hands, thereby causing some old hands to be discharged, how 
can it be asserted that the field of employment is enlarged ? how denied 
that it is diminished ?" 

The theory expressed or implied in these passages is that 
the demand for labor, in so far as it affects the wages of labor, 



''MAKING work:' 251 

depends upon and is measured by the quantity of industrial 
woi-k to be done, which quantity of industrial work, Mr. Thorn- 
ton tells us, is "at any given time a fixed quantity" (pp. 834, 
335); a position from which the direct inference is — an infer- 
ence partially drawn by Mr. Thornton himself — that the in- 
terests of labor are promoted by whatever tends to increase 
the quantity of work which society has to do ; while those in- 
terests are proportionally prejudiced by whatever tends to cur- 
tail the quantity of needed work. Now there can be no ques- 
tion as to the very great plausibility of this doctrine. I sup- 
pose there are very few working-men, and perhaps not a great 
many outside their ranks, who would not accept it as thus 
stated. We all see at once that labor will only be employed 
where there is work to be done ; and again, that the more work 
there is to do of a particular kind, the more laborers there will 
be employed in doing that particular work ; while it is also 
true that, where the work required is of a very urgent kind, 
employers will be disposed to raise their offer of wages in or 
der to attract labor. All this is indisputably sound and true ; 
and the conclusion drawn from these unquestionable premises, 
that the interest of the laboring classes lies in the work needed 
by society being as great and as urgent as possible, certainly 
seems plausible enough. Nevertheless I must make bold to 
say that, within the range of economic reasoning, no more pro- 
found fallacy finds a place than is contained in this inference; 
nor, I must add, is there one more pregnant with practical con- 
sequences of a pernicious kind. Observe some of the conse- 
quences that flow from it. If the interests of labor require 
that the quantity of work to be done by labor be as large as 
possible, then it follows that all labor-saving machines are op- 
posed to the laborer's interests. Mr. Thornton, as we have 
seen, admits that this is so whenever the new machinery does 
not, as in the instances which he adduces, create as much new 
work as it sets aside of old (p. 339). What proportion of all 



252 TBADES -UNIONISM.— 11. 

the machinery employed in helping industry in this country 
would, under this qualification, escape condemnation, as not 
injurious to the laborer's interests, I will not attempt to con- 
jecture — I should expect an exceedingly minute fraction of 
it; but at least it is evident that so much of it as is used in 
the later stages of manufacture — certainly all connected with 
the finishing stages of the process — would fall under the de- 
scription of machinery which created no new work to take the 
place of what it superseded ; and would therefore, according to 
Mr. Thornton's view, be properly characterized as hostile to 
the interests of labor. Again, by parity of reasoning, separa- 
tion of employments is opposed to the same interests; for what 
else is the purpose of thus organizing industry, but in order to 
make it more effective ; in other words, to abridge the amount 
of society's work? If every man who took part in pin-mak- 
ing were compelled to make the entire pin — to draw out the 
wire, to straighten it, to cut it, to point it, to grind it at the 
top for receiving the head, to make and put on the head, etc. 
— the number of men required for the work of pin - making 
would be indefinitely greater than at present, and, no other 
work being superseded, the field for the employment of labor 
would, according to the view we are considering, be greatly 
e^Jtended. Division of labor, therefore, which narrows this 
field, is, according to this principle, plainly opposed to the in- 
terests of labor. Nor is free trade less clearly condemned by 
the same doctrine. The international exchange which it pro- 
motes is merely an example of division of labor on a great 
scale, and works toward precisely the same end as the more 
simple forms — the economy of labor in the production of com- 
modities. But these examples only represent one side of the 
consequences which may be drawn and have been drawn from 
this notable principle ; for if the laborer is damnified by what- 
ever tends to abridge the " work to be done," we may also 
argue conversely that he must be proportionally benefited by 



" MAKING WORK." 253 

whatever increases it, more particularly if the additional work 
be of an urgent kind. A hurricane, e. g., which strips our 
roofs, and smashes our windows, and sweeps away our hag- 
gards, becomes in the light of this theory a beneficent influ- 
ence, pregnant with riches for the sons of toil — * 

" The clouds we so much dread 

Are big with mercy, and shall break 
In blessings on tJieir head." 

It increases the quantity of work to be done, and so, as the 
saying goes, "is all for the good of trade." So also must it 
be for the good of trade, according to the same doctrine, that 
thieves and burglars should abound, since does it not create 
plenty of policeman's work ? Does it not compel us to place 
bolts and bars upon our doors and windows, thus creating 
work for smiths i\ud carpenters? Further, consider all the 
work that is rendered imperative by the aggressive instincts 
and ambitious designs of nations against each other: standing 
armies, arsenals and fortifications, arms and ammunition — 
what a vast amount of work to be done do not these things 
represent ! And how would not merely the soldier's, but the 
productive laborer's occupation be gone, or at all events be 
seriously abridged, if ever the disastrous consummation should 
arrive of general disarmament and universal peace! We are 
accustomed to laugh at the celebrated petition of the chandlers 

* That I have not exaggerated the argument will be seen from the following ex- 
tract from an editorial article in the New York Tribune (October 24, 1871) apro- 
pos of the burning of Chicago, which I find in Mr. Wells's Essaj' in tlie Cobden 
Club volume: "The money to replace what has been burned will not be sent 
abroad to enrich foreign manufactures ; but, thanks to the wise policy of protec- 
tion which has built up American industries, it will stimulate our own manufac- 
tures, set our mills running faster, and give emploijment to thousands of idle work- 
men. Thus in a short time our abundant natural resources will restore what has 
been lost, and in converting the raw material our manufacturing interests will take 
on a new activity." 



254 TEADES -UNIONISM.— 11. 

and lamp-manufacturers, recorded by M. Bastiat, for excluding 
the ligbt of the sun. But the simple object of that petition 
was to increase the quantity of social work to be performed; 
and, for my part, I am unable to see how those who accept 
the theory I am now combating could consistently refuse their 
signatures. 

Where, then, is the fallacy in the reasoning which leads 
to these conclusions? If labor will only.be employed where 
work is to be done, and will be employed more largely in any 
given work in proportion as there is more of that work to do ; 
and if again, as the work becomes more urgent, the laborer is 
more sought; why is it wrong to say that it is the interest of 
the laborer that the quantity of work to be done should be as 
large, and the need for it as urgent, as .possible? The answer 
is twofold : in the first place, what laborers are interested in is 
not work, but remuneration. People, said Archbishop Whate- 
ly, go about saying "they want work," when what they really 
want is wages. This sounds like a jest; but the confusion of 
thought it exposes is precisely the confusion embodied in the 
argument just stated. Work and wages are there assumed 
to be, if not strictly convertible terms, at least facts so closely 
bound together that an increase of the one may be taken as 
equivalent to an increase of the other. Now, before going 
further, it may be well to expose the utter groundlessness of 
this notion as a matter of fact; and a Blue Book recently is- 
sued by the Government* fortunately supplies me with what 
is necessary for this purpose. 

I take the three countries, Germany, England, and Califor- 
nia: I find that in the first the number of hours in a working 
day varies between fourteen, for some occupations, and, for the 
great majority, twelve. In England it is now mostly ten, but, 
in an increasing number of trades, nine only. In California 

* " Condition of the Working-classes in Foreign Countries," 1871. 



WOBK AND WAGES. 255 

ten is the maximum, wiiile in many trades the number is as 
low as eight. Now it would no doubt be unwarrantable to 
assume that the work to be done in different countries varied 
for a given quota of working-people with the number of hours 
in a working day, inasmuch as one man may put as much 
work into nine hours as another into fourteen ; but the crite- 
rion would be correct unless so far as it was affected by the 
different efficiency of labor in different countries. Taking ac- 
count of this, and assuming, what I imagine is quite in excess 
of the truth, that English labor is more efficient than German 
in the proportion of fourteen or twelve to ten or nine, it would 
follow that the work to be done in Germany would bear about 
the same proportion to her laboring population as the work 
to be done in England bears to the laboring population of 
this country. With regard to California, I do not suppose it 
would be contended that labor there is more efficient than in 
England, and we may, therefore, assume that the work to be 
done in the two countries, in its relation to the laboring popu- 
lation of each, is fairly represented by the respective lengths 
of their working-day. The result of our comparison then is, 
that the work to be done in the three countries, Germany, En- 
gland, and California, bears about the same proportion in each 
to the number of the laboring population. This being so, if 
the connection between work and wages be such as the the- 
ory we are considering assumes, wages in the three countries 
should be about the same. In point of fact, I need scarcely 
say wages in California, even after making all due allowance 
for the difference in the range of local prices here and there, 
are at least double what they are in England, and at least four 
times what they are in German}^ So little connection is there 
in reality between the quantity of work which a given socie- 
ty has to perform and the rates of wages prevailing in that 
society. 

This, however, is neither the only, nor the least fallacy in- 



256 TRADES-UNIONISM.— II. 

volved in the doctrine we are considering. It is a necessary 
assumption in that doctrine — indeed the position is formally 
taken by Mr. Thornton — that "the quantity of work to be 
done" is at any given time a "fixed" quantity. Now this 
must at once be met by a direct denial. The work which so- 
ciety has to do is not a fixed quantity. On the contrary, it 
is absolutely indefinite and practically unlimited: indefinite, 
as varying with human wants and desires; and practically un- 
limited, because always for in excess of what human hands 
can accomplish. I am speaking now, not of society in its early 
stages, when human desires, and therefore the work of socie- 
ty, may, with some truth, be said to be confined within certain 
narrow and tolerably fixed bounds, but of society as we know 
it in Western Europe and the United States, after civilization 
has kindled those insatiable aspirations and created those in- 
numerable needs which distinguish the civilized from the un- 
civilized man. In society, when it has reached this stage, 
there is no practical limit to the desires of human beings, nor 
therefore to the quantity of work which they would wish to 
have done ; and even though the course of civilization should 
be, as I trust it may be, toward the adoption of simpler tastes 
and habits in all that concerns mere physical well-being, the 
introduction of more simple modes of life, while limiting the 
range of wants in one direction, would not fail, we may rea- 
sonably assume, to open the door to new paths of expenditure 
in others. Benevolence and public spirit, the interests of sci- 
ence and literature, would become powerful and exigent, as 
the tastes for mere physical luxury and personal indulgence 
or aggrandizement declined, and would rapidly create wants 
to take the place of those which would now be no longer felt. 
The social work to be done, therefore, though under such a 
regime as we are contemplating differing much from that which 
now occupies industry, would still be as indefinite and as prac- 
tically unlimited as ever. There is thus no practical limit to 



SOCIAL WORK, INDEFINITE. 257 

the quantity of social worlv to be performed ; and we may 
now see the true nature of the relation in which all the vari- 
ous contrivances — machinery, separation of employments, free 
trade — which tend to economize and abridge human labor, 
stand to the interests of those whose labor they supersede. 
Their effect is not to curtail the aggregate amount of social 
work — that, as I have said, is always far in excess of what hu- 
man capacity can accomplish — -but to alter the nature of that 
work. So much labor and capital are relieved from the tasks 
formerly required of them, and set free for the performance of 
new work, for the satisfaction of cravings hitherto unfelt. I 
quite admit that the change from one mode of production, or 
from one system of industry to another, even though that oth- 
er be a better one, is almost always attended with more or less 
temporary inconvenience, and sometimes even with consider- 
able suffering, for those whose occupations have been dis- 
placed; and this is a good reason for society doing all in its 
power to alleviate and repair these inevitable but transitory 
evils. But we have now to do, not with the incidental con- 
sequences of improvements, but with their essential character 
and permanent significance as regards the interests of labor; 
and I say that, regarding them in this light, their tendency is, 
not to leave society without occupation, but to alter from time 
to time the occupations with which society busies itself — to 
provide for the easier satisfaction of its primary and more 
pressing wants, and thereby to render possible the further sat- 
isfaction of numerous secondary wants of a less urgent kind. 
A limit indeed there is — a very real limit — to the employment 
of labor in a limited area of country ; but that limit does not 
lie in the quantity of social work, but in the productive power 
of the agents employed in performing it — in other words, in 
the increasing cost of production. The work is there to do, 
but the efforts needed to accomplish the work are greater than 
the product is thought to be worth. Here is the true and 

17 



258 TRADES-UNIONISM.— II. 

only limit to the employment of labor; and its removal or ex- 
tension is to be sought, not in multiplying the obstacles that 
oppose the satisfaction of human desires, and so " making 
work," but in precisely the opposite direction — in the removal, 
as far as may be, of such obstacles, and in freely availing our- 
selves of all arts and contrivances by which human effort may 
be rendered productive of larger result. Increase the produc- 
tive powers of industry, extend the knowledge of the industrial 
arts which support and comfort mankind, and there is little 
danger that laborers will ever fail of employment for want of 
work to do. 

So much, then, for that view of economic doctrine which 
identifies human well-being with the maintenance and mul- 
tiplication of the obstacles to its attainment ; in the words 
of Bastiat, confounding obstacle with cause, and effort with 
result. 

§ 4. Let us now observe its practical development in the 
rules of Trades-Unions. The following examples I take from 
Mr. Thornton's work : 

" Some Unions divide the country round them into districts, and -will 
not permit the products of the trades controlled by them to be used, ex- 
cept within the district in which they have been fabricated At 

Manchester this combination is particularly eflFective, preventing any 
bricks made beyond a radius of four miles from entering the city. To 
enforce the exclusion, paid agents are employed ; every cart of bricks 
coming toward Manchester is watched, and if the contents be found to 
have come from without the prescribed boundary the brick-layers at 
once refuse to work The vagaries of the Lancashire brick-mak- 
ers are fairiy paralleled by the masons of the same county. Stone, when 
freshly quarried, is softer, and can be more easily cut than later : men 
habitually employed about any particular quarry better understand the 
working of its particular stone than men from a distance ; there is great 
economy, too, in transporting stone dressed instead of in rough blocks. 
The Yorkshire masons, however, will not allow Yorkshire stone to be 



SOCIAL WORK, INDEFINITE. 259 

brought into their district if worked on more than one side. All the 
rest of the working, the edging and jointing, they insist on doing them- 
selves, though, they thereby add thirty-five per cent, to its price 

A Bradford contractor, requiring for a stair-case some steps of hard 
delf-stone, a material which Bradford masons so much dislike that they 
often refuse employment rather than undertake it, got the steps worked 
at the quarry. But when they arrived ready for setting, his masons in- 
sisted on their being worked over again, at an expense of from 5«. to 10s. 
per step. A master-mason at Ashton obtained some stone ready polished 
from a quarry near Macclesfield. His men, however, in obedience to the 
rules of their club, refused to fix it until the polished part had been de- 
faced and they had polished it again by hand, though not so well as at 

first 

"In one or two of the northern counties, the associated plasterers and 
associated plasterers' laborers have come to an understanding, according 
to which the latter are to abstain from all plasterers' work except simple 
whitewashing; and the plasterers in return are to do nothing, except 
pure plasterers' work, that the laborers would like to do for them, inso- 
much that if a plasterer wants laths or plaster to go on with, he must not 
go and fetch them himself, but must send a laborer for them. In conse- 
quence of this agreement, a JMr. Booth, of Bolton, having sent one of his 
plasterers to bed and point a dozen windows, had to place a laborer with 
him during the whole of the four days he was engaged on the job, though 

any body could have brought him all he required in half a day 

' Not besting one's mates ' has by several Unions been made the subject 
of special enactment. ' You are strictly cautioned,' says a by-law of the 
Bradford Brick-layers' Laborers, ' not to overstep good rules by doing 
double work, and causing others to do the same in order to gain a smile 
from the master. Such fool-hardy and deceitful actions leave a great por- 
tion of good members out of employment. Certain individuals have been 
guilty, who will be expelled if they do not refrain.' The Manchester 
Brick-layers' Association have a rule providing that ' any man found run- 
ning, or working beyond a regular speed, shall be fined 2s. Qd. for the 
first oflfense, 5s. for the second, 10s. for the third, and if still persisting 
shall be dealt with as the committee think proper.' As also shall be 
' any man working short-handed, without man for man.' .... At Liv- 
erpool, a brick-layer's laborer may legally carry as many as twelve bricks 
at a time. Elsewhere ten is the greatest number allowed. But at Leeds 
' any brother in the Union professing to carry more than the common 



260 TBADES-UNIOmSM.- II. 

number, whicli is eight bricks, shall be fined Is.;' and any brother 
' knowing the same without giving the earliest information thereof to 
the committee of management, shall be fined the same.' .... During 
the building of the Manchester Law Courts, the brick - layers' laborers 
struck because they were desired to wheel bricks instead of carrying 
them on their shoulders." 

The purpose and general tendency of these regulations can 
not be mistaken. Their object is, by enforcing uneconomical 
methods, and proscribing recourse to the facilities offered by 
nature and circumstances, to create a necessity for work which 
otherwise would not have existed. The code is, from first to 
last, an example of that view of Political Economy of which 
the culminating triumph would be the exclusion of the light 
of the sun. It must be admitted at once that the method is 
not devoid of a certain efficacy. It does tend to cause a larger 
capital to be invested in certain trades than would otherwise 
find entrance to them, and thus either to raise the rate of 
wages in them, or to increase the number of laborers emploj^ed 
at a given rate. So much must be admitted. But then this 
end is attained at the cost of diminishing the sum total of re- 
sult from human industry, so that whatever gain it procures for 
the individuals or classes who benefit by it is necessarily pur- 
chased at the cost of inflicting a more than equivalent loss on so- 
ciety as a whole. I say a more than equivalent loss ; for the 
total return upon industry being diminished by this preposter- 
ous polic}^, while the share of certain classes is increased, it is 
plain that what falls to the remainder will be less, not merely 
by what the former gain, but by this plus the loss upon the 
entire social fund. The sort of selfishness, therefore, embodied 
in these rules of Trades-Unions is not selfishness of the ordi- 
nary humdrum kind, which merely grasps for one's self what 
would fairly have gone to another, but that more extreme form 
of the propensity which is ready to inflict a great evil on anoth- 
er in order to secure a small good for one's self — to burn down 



RULES FOR "MAEIXa WORK." 261 

our neighbor's house in order to roast our own egg. Nor is 
this the most serious objection to this portion of the Unionist 
code. It carries the deeper stigma of sinning against the in- 
terests of civilization itself; for its spirit is antagonistic to all 
progress and improvement, and, if it did not carry us back, as 
logically it ought, to a rejection of all the labor-saving contriv- 
ances and aids which art and science have won for industry, 
would, at the very least, tend to stereotype industrial operations 
in their existing forms. The very meaning of industrial prog- 
ress is the increase of the productive result in proportion to 
the labor undergone ; while the direct tendency of the rules in 
question is to increase the labor undergone in proportion to the 
productive result. I am far, indeed, from desiring to charge 
these consequences, as a deliberate purpose, on the Unionist 
leaders, and still less on the workmen who have accepted and 
acted on their legislation. On the contrary, I am persuaded 
that the true character of those regulations is either entirely 
misconceived, or, at the utmost, most inadequately appreciated, 
by those for whose benefit they are intended. The view which 
has suggested them, far from being confined to the working- 
classes, has, as we have seen, found for its champion so able and 
dispassionate a writer as Mr. Thornton, who, while denouncing 
in language which certainly leaves nothing to be desired in 
point of vigor and heartiness those elaborate contrivances for 
rendering man's position in the world worse than it might be, 
has himself furnished the theoretical premises which would be 
quite sufficient, if only they were well founded, to justify the 
most extravagant of the acts which he reprobates. It must 
also be frankly confessed, with reference to this as with refer- 
ence to other parts of the Unionist policy, that the better-off 
classes of society are by no means entitled to plume themselves 
at the expense of the workmen. In the practice of the legal 
profession, e. g., there would, I fancy, be no difficulty in finding 
usages, not yet perhaps quite obsolete, conceived in this same 



262 TBADES-JJNIONISM.—II. 

spirit of aggrandizing a calling bj "making work "for its 
members. One has only to watch the progress of an ordinary 
Chancery suit, or to read through an ordinary deed, to find ex- 
amples which would scarcely lose in lustre by being placed be- 
side some of the brightest of those furnished by the Manches- 
ter Brick-layers' Association. What, indeed, is the opposition 
given to law reform by too large a section of the legal profes- 
sion but a flagrant example of this very spirit — a readiness to 
sacrifice the interests of society at large to those of the legal 
profession, to arrest the progress of social improvement, in 
order that work may be found for a few lawyers the more? 
The notion of aggrandizing one's order by "making work" 
for it may assume in Trades-Union codes a somewhat more ex- 
travagant and grotesque form than elsewhere; but the princi- 
ple itself is deeply embedded in the practical modes of think- 
ing and acting of nearly all classes ; and it therefore needs all 
the more to have its true character and tendencies laid bare 
without reserve, and to be duly stigmatized as the most in- 
tensely selfish and the most flagrantly anti-social of all the 
plans of conduct by which, at various times, different classes 
of society have attempted, in disregard of the general social 
weal, to advance their several interests. 



CHAPTER Y. 

PRACTICAL DEDUCTIONS FROM THE FOREGOING PRINCIPLES. 

§ 1. In the foregoing chapters the theoretical conditions gov« 
erning the position of the laborer and the rate of his remuner- 
ation, have, it is to be hoped, been pretty fally set forth. It 
remains now to consider the practical conclusions, in relation 
to his actual condition and future prospects, which may be 
drawn from the premises thus furnished. 

But at this point an objection would probably be interposed 
by a certain class of thinkers on social subjects, and I may be 
challenged to say why, conceding the economic principles af- 
fecting the subject to be such as I have stated them, the dis- 
tribution of the produce of industry should be left to be de- 
termined by those principles; why it should not rather be reg- 
ulated b}'' the laws of justice? In answer to which I must 
reply, in the first place, that I am unaware of any rule of justice 
applicable to the problem of distributing the produce of in- 
dustry ; and, secondly, that any attempt to give effect to what 
are considered the dictates of justice, which should involve as 
a means toward that end a disturbance of the fundamental £is- 
sumptions on which economic reasoning is based — more espe-A 
cially those of the right of private property and the freedom / 
of individual industry — would, in my opinion, putting all other 
than material considerations aside, be inevitably followed by 
the destruction or indefinite curtailment of the fund itself from 
which the remuneration of all classes is derived. 

§ 2. If justice be the principle according to which the pro- 
ceeds of industry ought to be distributed, those who advocate 



264 PRACTICAL DEDUCTIONS. 

this mode of distribution are bound to produce some work- 
in o- rule according to which the principle they contend for 
is to be carried into effect. Several such rules have indeed 
been propounded, and others may easily be imagined, which 
would have quite as good a title to the claim of representing 
natural justice as any that have been advanced by social 
reformers. For example, it has been held by one social re- 
former that the rule of distribution required by justice is that 
indicated by the wants of human beings and the degree of 
their urgency, in accordance with which view the formula 
of distributive justice would be — "to each according to his 
wants." In the opinion of another, distribution ought to be 
regulated by the degree in which each has contributed by 
his efforts to the fund available for distribution ; the formula 
of distributive justice becoming in this case — "to each ac- 
cording to his works." And perhaps as plausible a principle 
as either might be constructed by founding the rule of distri- 
bution on the proportional sacrifice undergone by those who 
take part in the work of productive industry ; in which case 
we should have as our formula — "to each according to his 
sacrifice." As to the amount of truth or morality which these 
several maxims embody, I am not concerned here to inquire. 
My business with them has reference exclusively to their effi- 
cacy as rules for regulating the distribution of wealth. But in 

r proceeding to examine them with this view, I am anxious to 
disclaim all desire to disparage the ideals of human life which 
they suggest, provided they be regarded simply as ideals — as a 
goal toward which one may work and strive, due consideration 
being had of the actual circumstances of the external world, 
and of the character, as hitherto actually developed, of human 

^beings residing upon it: indeed, so far from this, I have no 
hesitation in admitting that the realization of any one of them 
would imply, a condition of society incomparably superior to 
any that now exists, or is likely for a long time to exist. So 



SOCIALIST MAXIMS. 265 

far I am quite prepared to join in socialistic aspirations. 
Where I take issue with the Socialists is as to the present 
feasibility of their schemes, and as to tlie means by which the 
ends they desire are to be promoted. I altogether deny that 
in the actual circumstances of mankind the distribution of 
wealth on the principles they contend for is feasible; and I be- 
lieve that the attempt to carry those principles into effect by 
invoking for this purpose the powers of the State — which I ^ 
take to be the essential characteristic of Socialism, and that 
which broadly distinguishes it from other modes of social spec- 
ulation* — could only issue in disaster and ruin. 

* In this I venture to differ from the great man recently taken from among iis, 
whom I am proud to call my friend and teacher. In a remarkable passage of the 
"Autobiography," Mr. Mill represents himself as properly classed " under the gen- '- 
eral designation of Socialists," because his ideal of ultimate improvement had more 
in common with that of Socialistic reformers than with the views of those \\'ho 
in contradistinction would be called orthodox. "While we repudiated with the 
greatest energy that tyranny of society over the individual which most socialistic 
systems are supposed to involve, we yet looked forward to a time when society 
will no longer be divided into the idle and the industrious ; when the rule that 
they who do not work shall not eat will be applied, not to paupers only, but im- 
partially to all ; when the division of the produce of labor, instead of depending, 
as in so great a degree it now does, on the accident of birth, will be made by con- 
cert on an acknowledged principle of justice; and when it will no longer either be, 
or be thought to be, impossible for human beings to exert themselves strenuously in 
procuring benefits which are not to be exclusively their own, but to be shared with 
the society they belong to." ("Autobiography," pp. 231,232.) If to look forward 
to such a state of things as an ideal to be striven for is Socialism, I at once acknowl- 
edge myself a Socialist; but it seems to me that the idea which "Socialism " con- 
veys to most minds is not that of any particular form of society to be realized at 
a future time when the character of human beings and the conditions of human 
life are widely different from what they now are, but rather certain modes of ac- 
tion — more especially the employment of the powers of the State for the instant 
accomplishment of ideal schemes, which is the invariable attribute of all projects 
generally regarded as Socialistic. So entirely is this the case, that it is common 
to hear any proposal which is thought to involve an undue extension of the powers 
of the State branded as Socialistic, whatever be the object it may seek to accom- 
plish. After all, the question is one of nomenclature merely ; but people are so 



266 PRACTICAL DEDUCTIONS. 

§ 3. As regards the first of the formulas to which I have 
referred, which proposes to distribute the wealth of a commu- 
nity among its members in proportion to their wants, I must 
frankly acknowledge that I am wholly unable even to con- 
jecture the method of its application. How are the wants of 
individuals to be ascertained ? Is it to be left to each to de- 
scribe his own wants ? And if the funds are not adequate 
to meet the requirements of all, who is to decide as to which 
wants are the most urgent ? A man with a large family has 
greater wants than a man with a small one. Does this consti- 
tute a title to a proportionally larger share of the proceeds 
of industry? And if so, what is to keep the population of a 
country within the necessary limits of the means of subsist- 
ence ? Such are some of the questions which meet us on the 
threshold in seeking to apply this formula, every one of which, 
it seems to me, leads us straight into a cut de sac. I must 
therefore put aside this particular form of the law of distribu- 
tive justice as for me utterly unmanageable. The two latter 
principles, however, of which one would assign wealth to each 
person in proportion to the work he has accomplished, and the 
other in proportion to the sacrifice he has undergone, are not 
at once and obviously impracticable; and in point of fact both 
one and the other do exert, under our existing system of in- 
dustry, a certain influence in determining the distribution of 
wealth. For example, wherever the results of industry admit 
of being measured and compared, as in all work of the same 
kind, the remuneration of the workman, if only competition is 
effective, naturally adjusts itself to the results of his work. A 
workman who in a given time can perform twice as much of 
a given work as another will in an open market command 
twice as much wages. But where the results of industry are 

greatly governed by words that I can not bnt regret that a philosophy of social life 
with which I so deeply sympathize should be prejudiced by verbal associations fit- 
ted, as it seems to me, only to mislead. 



BULE OF SACRIFICE. 267 

different in kind, how is the rule of distribution in proportion 
to results to be applied ? One man in a day produces a coat, 
another a table, a third superintends a body of workmen — by 
what standard shall we measure these several results, and say 
that any of them is greater or less than any other? It is plain 
that the rule of distribution in proportion to results fails us ut- 
terly here. Similarly, the principle of distribution in propor- 
tion to sacrifice has also, under our present regime (as was seen 
in a former portion of this work), a certain operation in deter- 
mining the distribution of wealth. It is indeed the ruling prin- 
ciple of distribution wherever competition among producers is 
really free. But, as was then pointed out, the field of compe- 
tition, though large, is far from being co-extensive with the in- 
dustry of any country, and, in the absence of competition, it 
is not easy to see how relative sacrifice is to be determined. 
More particularly does this difficulty become formidable when 
we come to deal with what may be regarded as the crucial 
problem of distribution — the distribution of the proceeds of in- 
dustry between laborer and capitalist. Even could the claims 
of laborers as among themselves be adjusted, there would still 
remain this problem, which the least consideration of the facts 
involved will show to be wholly unamenable to a prion treat- 
ment, whatever be the form which the rule of justice may 
assume. 

Let us suppose, for example, a benevolent despot desirous of 
applying to this case what we may describe as the principle of 
efficiency — "to each according to his works." He finds that 
a house has been built by the combined action of a master- 
builder and workmen : the former has supplied the materials 
for the building and the means of supporting the laborers dur- 
ing the performance of the work, the latter have furnished the 
labor : how is our despot to determine how much of the house 
or of its value is to be credited respectively to him who has 
supplied the capital, and to those who by their labor have con- 



SJ68 PBACTICAL DEDUCTIONS. 

verted this capital into a house? Again, a master-tailor sup- 
plies a sewing-machine and cloth ; journeymen tailors go to 
work on these articles, and a suit of clothes is the result — what 
proportion of the clothes is to be credited respectively to the 
machine and to the workmen ? It is only necessary to pro- 
pound such questions to perceive that they are absolutely in- 
soluble. As well might we seek to determine the proportions 
in which the oxygen, the hydrogen, and the electric flash have 
contributed to the drop of water which results from their com- 
bined action. Nor would the standard of relative sacrifice be 
any more to our purpose here. As I have already remarked, 
it is not easy to see how relative sacrifice is to be estimated in 
the absence of competition ; and more particularly is this the 
case where the sacrifices to be compared take forms so widely 
different in character as those undergone by laborer and capi- 
talist. What are those sacrifices? On the one hand, certain 
physical and mental efforts, involving weariness, exhaustion, 
and sometimes positive pain ; on the other, a mere abstinence 
from enjoyment which might have been indulged in, accom- 
panied with a certain sense of insecurity as to the issue of an 
undertaking. Who can compare and appraise two such sacri- 
fices, and undertake to assign to each its due reward ? Mani- 
festly at this point, the principle of sacrifice, no less than that 
of efficiency, inevitably breaks down. Even could they have 
solved all other cases, we are forced to confess that, in pres- 
ence of the most important and pressing of all — the relative 
claims of labor and capital — both principles are impotent alike. 
Right or wrong, therefore, they are inapplicable to the ques- 
tion in hand, and so will not serve our turn. 

§ 4. I am thus unable to find in the maxims of abstract jus- 
tice any key to the practical problems of the distribution of 
wealth; and I am bound to add, that just as little can I dis- 
cover in the actual results flowinof from the action of econom- 



JUSTICE AND ECONOMIC LAW. 269 

ical laws a realization of the principles of abstract justice. 
There is indeed a school of economists, of whom M. Bastiat . 
may be taken as the prophet, who have persuaded themselves 
that such a realization is in fact accomplished, who hold that 
the distribution of wealth which results from the free play of 
economic forces is not merely that which the circumstances of 
the case render inevitable, but also that which justice and nat- 
ural right prescribe. I must frankly own that I am wholly \^ 
unable to concur in this view. For when I look into the na- 
ture of those economic forces on the play of which the actual 
distribution of wealth in this and other civilized countries de- 
pends, what do I find? Certain physical, physiological, and 1 
mental conditions' — on the one hand, a productive capacity 
in the soil and other natural agents; on the other, certain ele- 
ments in the character of the people, such as the desire to 
accumulate wealth and provide for the future, and constant- 
ly counteracting this, a love of present ease and indulgence; 
lastly, the animal propensities which continue and multiply , 
the race. These are the forces which, coming into play under 
a regime of private property and freedom of individual indus- 
try and enterprise, determine the proportions in which wealth 
is divided among a people. But what is there in such cir- ~] 
cumstances to make it necessary that the distribution which 
results shall be in conformity with what our ideas of justice . 
would require? What is there in the case to secure that the ' • 
action shall always be in the lines of moral right? The agen- "^ " 
cies in operation are essentially out of the moral sphere; and 
if it should in foct happen that the results arising from their 
free action in any given case prove to be in strict accordance 
with the claims of moral justice, and with so-called "natural 
rights," I do not see that we should be justified in regarding 
the coincidence as other than a fortunate accident. In point 
of fact, the practical consequences accruing from the condi- 
tions of industry in this and other civilized countries are not 



270 PBACTICAL DEDUCTIONS. 

such as, for my part, I should find it easy to reconcile with 
any standard of right generally accepted among men.* 

§ 5. It seems to follow from these considerations that while, 
on the one hand, mere standards of abstract justice or natural 
right are inefficacious as means of solving the actual problems 
of the distribution of wealth, on the other the solution actual- 
ly effected of those problems under our existing system of in- 
dustry is not such as entitles us to claim for it, as a necessary 
consequence of the agencies through which it is worked out, 
the character of satisfying the requirements of moral justice. 
\ If our present system of industry is to be justified, it must, ac- 
cording to my view, find its justification in quite another or- 

1 der of ideas than those ofabstract right or natural law — name- 
ly, in the considerations of practical utility ; and more specif- 

.. ically in the fact that it secures for the mass of mankind a 
greater amount of material and moral well-being, and provides 
more effectually for their progress in civilization, than any oth- 
er plan that has been yet, or apparently can be, devised. 

By our present system of industry, let me here explain, I 
mean simply the industrial arrangements and the mode of 
distributing wealth which prevail in this and other civilized 
countries, so far, and so far only, as these result from the rec- 
ognition of private property and freedom of individual indus- 
try and enterprise. These latter institutions, it is true, are far 
from representing fixed and absolute conditions ; and the mod- 
ifications with which they are affected in different countries 
lead to important differences in the practical outcome accruing 
from their maintenance. Into the question of such moditica- 

* I may here at least claim Shakspeare as an authority on my side : 

"Take physic, Pomp, 
Expose thyself to feel what wretches feel ; 
That thou may'st shake the superflux to them, 
And show the heavens more just." 



GEOUXDS OF DEFENSE. 271 

tions I do not enter here. The issue taken by those who ad- 
vance sociahstic objections, founded on allegations of inequali- 
ty and injustice, against existing industrial arrangements, has 
regard to the principles themselves, not to their modifications; 
and, therefore, in defending these arrangements against such 
objections, it is with the principles alone that we need con- 
cern ourselves. Nor, indeed, have I any need here to enter at 
large into the controversy between Communism and private 
property. That question may now, I think, be said to be, so 
far as argument can carry it, sufficiently disposed of: at all 
events, I could hope to add nothing to what Mr. Mill has so 
admirably said in his examination of the subject — an exami- 
nation not less remarkable for its thoroughness than for the 
candor, and even tenderness toward those whose opinions he 
opposes, which it displays. But, without entering into the 
general question, I may venture to point out one capital con- 
sideration of a purely economic kind which, apart from the 
reasons, chiefly moral and political, relied on by Mr. Mill, ap- 
pears to me to justify the opinion in favor of our existing sys- 
tem of industry in its essential circumstances which I have 
ventured to express. 

I take it to be a fundamental and indispensable condition 
of all progressive human society, that by some means or other 
a large aggregate capital available for its requirements should 
be provided. Without such a fund, accumulated from the 
products of past toil, division of labor and continuous industry 
are impossible; population can not attain the degree of density 
indispensable to civilized existence; nor can that amount of 
leisure from physical toil be secured for any considerable por- 
tion of the people, which is required for the cultivation of 
science and literature. The maintenance, therefore, of an ag- 
gregate capital capable of providing for these requirements 
must be regarded as an indispensable condition to be fulfilled 
by every industrial system which undertakes to promote the 



272 PRACTICAL DEDUCTIONS. 

well-being and progress of mankind. Now cur economic 
investigations have shown us that this end, the storing up 
of the products of past industry for the purpose of sustaining 
and assisting present industry, can only be attained at the 
cost of certain sacrifices — those sacrifices, namely, implied in 
foregoing the immediate use of what people have the power 
of using, and in incurring the risk which attaches in' a great- 
er or less degree to all industrial investment. These sac- 
rifices may be regarded as trivial or severe; but, as a mat- 
ter of fact, they will not be undergone without an adequate 
motive in the form of a compensating reward. Such a mo- 
tive our present system of industry provides in the mainte- 
nance of private property and industrial freedom. The pros- 
pect of profit is the prospect of enjoying as property the 
results of industrial investment; and this prospect under a 
system of industrial freedom is thrown open to all who are 
in possession of wealth. The inducement thus offered to the 
acquisitive propensity in man constitutes, under the actual 
system of things, the great spring and support of productive 
capital, and, in the last resort, the ultimate security for all the 
results which go to form our material civilization. The feel- 
ing appealed to may, if you like, be a coarse one, but it is at 
any rate efficacious; it does lead to habitual and systematic 
saving, and furnishes society with the necessary material basis 
for civilized progress. But this motive every system which 
annuls private property and freedom of individual industry 
takes away ; and the question is, What do such systems sup- 
ply in its place? Two possible substitutes, so far as I know, 
and two only, have been or can be suggested — benevolence 
and public spirit. I should be very unwilling to disparage 
such principles of action, or to deny that they are at present 
extensively influential in human affairs; but I can not affect 
to believe that either, or that both together — taking human 
beings, not as in the progress of human improvement they 



REMUNERATION OF INDUSTRY. 273 

may possibly become, but as we now actually find them — • 
could be trusted to supply the place of that desire for individ- 
ual advancement and well-being to which the institutions of 
private property and industrial freedom make appeal. I am, 
therefore, unable to see how any system, which relies upon no 
stronger or more universal elements of human character than 
these for its support, can fulfill that primary and indispensable 
condition of all progressive society — the providing of a mate- \ 
rial basis for civilization in the form of an accumulated capital. 

§ 6. So much I have thought it well to say in justification 
of the fundamental bases of our present industrial system : it 
remains to consider what are the prospects offered by the sys- 
tem to the working-classes living under it, taking their con- 
dition to be governed by the economic laws developed in the 
previous portions of this work. 

The remuneration of industry, as we there saw, is derived 
from, and therefore must be limited by, the products which 
result from its exercise. In this exercise two distinct func- 
tions are embraced — that performed by labor and that per- 
formed by capital, each implying a sacrifice and demanding a 
reward. To the share of the produce to be assigned to the 
laborer Nature has herself very obviously set a minimum lim- 
it in the requirements essential to his existence: it can never 
permanently be less than will suffice to support, in such phys- 
ical and mental strength as the work performed calls for, those 
who carry it on. On the other hand, the capitalist's share also" 
finds a minimum limit in his disposition and character: it must 
at least be such as shall seem to him a sufficient compensation 
for the sacrifices which he incurs in investment, and will, there- 
fore, in a given community be high or low, according as that ^ 
element of character designated by Mr. Mill " the effective de- 
sire of accumulation " is weak or strong. It follows from this 
that, in order to the systematic prosecution of industry, the 

18 



374: PRACTICAL DEDUCTIONS. 

produce resulting must at least be sufficiently great to cover 
both these requirements — to yield, that is to say, a minimum 
wage and a minimum profit; if it be not equal to this, either 
hibor will fail for want of support, or capital will cease to be 
invested for want of adequate inducement. But the produce 
may be indefinitely greater than this; and hence arises a mar- 
"iu of return over and above what the satisfaction of the min- 
iina of wages and of profits demands. Now it is evident that 
by the extent of this fund the possibilities of the laborer's po- 
sition must, under all circumstances, be bounded. 

Two questions, accordingly, here at once arise; first, as to 
the possible increase of this margin of return as industry, with 
the progress of industrial art, becomes more productive ; and, 
secondly, as to the degree in which the working -classes are 
likely to appropriate such augmentation as may accrue. As 
regards the latter point, we have seen that profits in advan- 
cing communities tend to a minimum, from which we are justi- 
fied in concluding that, however the gain may for a time be 
divided between capitalist and laborer, the permanent tend- 
ency of things will be toward an absorption of the whole by 
wages. In whatever degree, therefore, the margin of the re- 
turn on industry, beyond what is needed to satisfy the minima 
of wages and profits, may increase with the progress of soci- 
ety, we are warranted in regarding the fund thence arising as 
available for the improvement of the laborer's condition. The 
question as to the possibilities of his future — supposing him 
to remain as at present a mere receiver of wages — thus turns 
entirely and simply upon the prospects of increase in this 
fund. 

And here I regret to say the outlook of the laborer is by no 
means so bright as a superficial view of the case might lead us 
to suppose. Understanding by the rate of wages the real re- 
muneration of the laborer, and by the rate of profit the ratio of 
the return upon capital, and bearing in mind that wages and 



riiODUCTIVENESS OF INDUSTRY. 275 

profits are derived from, and in fact represent, the products of 
industr}^, it might seem a safe position to assume that the fund 
available for the augmentation of the rates of wages and profits 
would increase pari passu with every extension of the power 
of man in the industrial sphere. Plausible, however, as this 
position seems, we may easily convince ourselves that it can 
not possibly be true. Let us consider this fact. Within the 
last century an enormous increase has taken place in the pro- 
ductiveness of industry in Great Britain, A given exertion of 
labor and capital will now produce in a great many directions 
five, ten, or twenty times, in some instances perhaps one hun- 
dred times, the result which an equal exertion would have pro- 
duced a hundred years ago: it is not probable that industry 
is in any direction whatever less productive now than it was 
then ; yet the rate of wages, understanding this in the sense 
defined, as measured by the real well-being of the laborer— 
though some improvement no doubt has taken place in his 
condition during this time — has certainly not advanced in any 
thing like a corresponding degree; while it may be doubted if "^ 
the rate of profit has advanced at all. If we were to take the 
current rate of interest as a criterion, we should be inclined 
to say that it had even positively fallen. It is certain, at all 
events, that neither the rate of wages nor the rate of profits, 
nor both rates combined, have experienced any increase at all 
commensurate with that which has occurred in the general pro- 
ductiveness of industry. Some one, no doubt, has benefited by 
the enlarged power of man over material nature ; the world is 
beyond question the richer for it; but what I wish to call at- 
tention to is that the gain, however realized, does not show 
itself, at least on the scale of its actual magnitude, either in the 
real remuneration of the laborer, or yet in the ratio of return 
upon the capitalist's outlay. 

What, then, is the relation of the productiveness of industry 
to '^hese phenomena? and how far can we count upon the prog- 



i^ 



276 FBACTICAL DEDUCTIONS. 

ress of industrial invention and improvement for enlarging 
that margin of return out of which all additions to the mini- 
mum rates of wages and of profits must be made? The cor- 
rect answer to this question may, I think, be thus stated: 
the productiveness of industry ordy affects the rates of wages and 
profits in so far as it results in a cheapening of the commodities 
which enter into the consumption of the laborer. This is a point 
not in general correctly apprehended, but it will not be diffi- 
cult to establish its truth. Let us suppose an improvement to 
take place in the mode of producing an article consumed only 
by the rich, and leading to a cheapened cost of production — 
what happens? Assuming that there is no monopoly, and al- 
lowing time for supply to adjust itself to demand, there will 
occur a fall in the value of the article in proportion to the 
fall in its cost of production. A given capital will yield in 
this particular commodity a larger return, but this increased 
return will only possess the same value as the smaller return 
previously obtained. The ratio, therefore, of the value pro- 
duced to the value expended will remain undisturbed. It 
follows that an improvement in industry of this descrip- 
tion, however it may temporarily profit individual producers 
pending the adjustment of supply to the altered conditions of 
demand, has no tendency to raise the rate of profit.* And 
it is sufficiently evident that it will not affect the remunera- 
tion of labor. Why should it? It has not increased either 
the capital of the country (for the cheapened article is by hy- 
pothesis an article of luxurious consumption) or the value of 
its products. The laborer's wages, measured in money (which 
we assume to remain constant in value) continue as before, and 
the only article cheapened is one which by hypothesis he does 

* This position would require qualification if the article of luxurious consump- 
tion which I have supposed to be cheapened could be made the means, through 
an exchange with foreign countries, of obtaining on cheaper terms food or othei 
laborer's commodities. 



PEODVCTITENESS OF INDUSTRY. 277 

not consume. If I am asked, Who then are the persons who 
benefit by improvements of this class? I answer, those who 
consume the commodity. If capitalists are consumers, then 
they will benefit as consumers^ but not in their quality of re- 
ceivers of profits. They will receive the same rate of return 
on their investment as before, but the sum resulting from this 
rate of return will give them a larger command than before 
over the articles of their consumption. We thus find that im- 
provements in productive industry, where they apply to com- 
modities consumed only by the rich, however they may bene- 
fit the rich, have no tendency to raise the rate of profit ; while 
they leave the remuneration of the laborer entirely unaffected. 
But now observe the consequence of improvements of another 
kind — those, namely, which affect commodities entering into 
the consumption of the laborer. Here, again, as in the case 
just considered, the article affected by the improvement would 
fall in price in proportion to the cheapening of its cost; but 
one or other of the following consequences would also happen : 
either the real remuneration of the laborer would increase in 
proportion to the cheapening of the commodity multiplied 
by the degree in which it entered into his expenditure; or, 
fixiling this, the rate of profit would rise. It is probable that, 
in the first instance at least, the former result is that which 
would occur. There is nothing in the cheapening of an arti- 
cle of the laborer's consumption to diminish the investment 
of capital or at once to increase the supply of labor. Money 
wages, therefore (the value of money being assumed to remain 
constant), would continue as before, and the laborer, in com- 
mon with other consumers, would reap the benefit of the im- 
provement in the diminished price of the commodity. If this 
did not happen — if money wages fell, let us suppose, so as just 
to neutralize the cheapened cost of the commodity, leaving the 
laborer's real remuneration unaffected — then the state of things 
would imply an advance in the rate of profit ; for the price of 



278 FKACTICAL DEDUCTIONS. 

the commodity falling in proportion as its cost nad diminished 
— that is to say, as the product of a given exertion of industry 
employed in making it had increased— the value of the aggre- 
gate return upon industry thus employed would be the same 
as before ; but the value of the outlay upon the same exertion 
of industry would have declined in consequence of the fall in 
money wages, and the ratio of the return to the outlay, that is 
to say, the rate of profit, would therefore have increased. It 
is thus through a limited class of commodities only that the 
progress of industry'- affects either the rate of profit or the la- 
borer's well-being; in other directions improvements may oc- 
cur and commodities be indefinitely cheapened to the advan- 
tage of consumers, but without extending in the least that mar- 
gin of return from which augmentations of wages and profits 
are derived. 

And now I am in a position to explain the phenomenon to 
which I have called attention — the fact, namely, that so little 
impression has been made on the rate of wages and profits by 
the immense industrial progress of recent times. The expla- 
nation lies in the following circumstances: 1st, the improve- 
ments have to a very large extent affected commodities not 
consumed by the laborer ; and, so far as this has been the case, 
there is, as we have seen, nothing in the circumstance of an 
increase in industrial efficiency to cause an advance in either 
wages or profits; and, 2dly, when the improvement has affect- 
ed commodities consumed by the laborer, the industrial advan- 
tage gained has rarely been maintained to its full extent, and 
frequently after a time has been entirely lost. What has hap- 
pened has been a temporary improvement of the laborer's con- 
dition, followed by an increase of population and an enlarged 
demand for the cheapened commodity. Laborers' commodi- 
ties, however, are for the most part commodities of raw prod- 
uce, or in which the raw material constitutes the chief ele- 
ment of the value (clothing is, in truth, the only important ex- 



IN RELATION TO RENT. 279 

ception); and of all such commodities it is the well-known law 
that an augmentation of quantity can only be obtained, other 
things being the same, at an increasing proportional cost. Thus 
it has happened that the gain in productiveness obtained by 
proved processes has, after a generation, to a great extent been 
lost — lost, that is to say, for any benefit that can be derived 
from it in favor of wages or profits; and though our industry 
is conducted with greater skill than formerly, yet being employ- 
ed on natural agents of inferior power or of greater remoteness, 
to which the needs of an increasing population have compelled 
us to resort, and the cost of the portion of the produce raised 
from those inferior natural agents being that which governs 
the price of the whole — it comes to pass that it now yields, 
capital for capital and effort for effort, no greater, or but a 
slightly greater, return. Not indeed that the introduction of 
improved processes into agriculture has been for naught: it 
has resulted in a large augmentation of the aggregate return 
obtained from the soil, but without permanently lowering its 
price, and, therefore, without permanent advantage to either 
capitalist, or laborer, or to other consumers. The large ad- 
dition to the wealth of the country has gone neither to profits 
nor to wages, nor yet to the public at large, but to swell a 
fund ever growing even while its proprietors sleep — the rent- 
roll of the owners of the soil. Accordingly we find that, not- 
withstanding the vast progress of agricultural industry effected 
within a century, there is scarcely an important agricultural 
product that is not at least as dear now as it was a hundred 
years ago — as dear not merely in money price, but in real cost. 
The aggregate return from the land has immensely increased ; 
but the cost of the costliest portion of the produce, which is 
that which determines the price of the whole, remains pretty 
nearly as it was. Profits, therefore, have not risen at all, and 
the real remuneration of the laborer, taking the whole field of 
labor, in but a slight degree — at all events in a degree very 



280 PRACTICAL DEDUCTIONS. 

far from commensurate with the general progress of indus- 
try* 

The reader will not fail to perceive the intimate bearing of 
the conclusion just reached upon the question which I have 
proposed for discussion in this chapter — the prospect of im- 
provement in the laborer's material condition. It is evident 
that this condition is by no means so linked to the general 
progress of industrial improvement that we can count upon an 
advance in it pari passu with that progress. A very consid- 
erable proportion of industrial inventions do not affect his well- 
being at all ; while with regard to those which, by cheapening 
the commodities of his consumption, do affect his well-being, 
the condition of permanent advantage to him from this source 
is that his numbers shall be kept within such limits that the 

* "How," asks Mr. (now Sir William) Harcourt, "is the laborer to get high- 
er wages, and yet the farmer to receive a reasonable profit, without which his bus- 
iness can not be carried on ? There is only one way in which it can be done, 
and that is by increasing the productive power of the land, which is the fund out 
of which both the wages and the profit must be realized. Well, how is the pro- 
ductive power of the land to be increased? The answer to that, too, is sim- 
ple enough, and is universally recognized, by applying more capital to the soil " 
(Times, Jan. 2, 1873), It does not seem to have occun-ed to Mr. Harcourt that 
the process which he advocates has been in operation on a great scale for at least 
a century, and yet that the agricultural laborer remains pretty nearly where he 
was before it commenced. Had he turned to Belgium, he would have seen the 
same experiment in operation with precisely the same result. Nowhere has cap- 
ital been more liberally applied to the cultivation of the soil than in Belgium, and 
nowhere is agricultural labor more wretchedly paid (see Laveleye's "L'lSconomie 
Rurale de la Belgique "). The following passage may be commended to Sir W. 
Harcourt's notice : " Malgre ces diffe'rences assez notables, le mal general et pro- 
fond qu'on ne peut se dissimuler, c'est qu'a peu pres partout le salaire des ouvriers 
agricoles est insuffisant pour faire face aux besoins de leurs families dans un pays 
oil les denrees atteignent le plus haut prix des marches eui'opeens. La statistique 
ofiicielle constate elle-meme que la population rurale de la Belgique est I'une des 
plus mal nourries du continent. Les produits de I'agriculture, quelque abondants 
qu'ils soient, ne suffisant point, avec la repartition actuelle, pour donner a tous une 
alimentation convenable " (p. 240). 



DISCOURAGING PROSPECTS. 281 

necessity of resorting to inferior instruments of production 
shall not neutralize the gain in industrial efficiency. This, 
then — the limitation of his numbers — is the circumstance on 
which, in the last resort, any improvement at all of a perma- 
nent kind in the laborer's condition turns. For my own part, 
I can not pretend to discern in the circumstances of the time 
any solid ground for feeling sanguine on this point, at least so 
long as laborers remain what they are mainly at present — mere 
laborers, hired eynployes depending for each day on the result 
of the day's work. But I desire to go further than this. I 
think the considerations which have been adduced show that 
even a very great change in the habits of the laboring classes 
as bearing upon the increase of population — a change far great- 
er than there seems any solid ground for expecting — would be 
ineffectual, so long as the laborer remains a mere receiver of 
wages, to accomplish any great improvement in his state — any 
improvement at all commensurate with what has taken place, 
and may be expected hereafter to take place, in the lot of those 
who derive their livelihood from the profits of capital. This 
is a point which perhaps needs some clearing up. It might 
seem to result from one doctrine on which I have laid some 
stress in this work — the tendency of profits to a minimum, 
while no such tendency can happily be asserted of wages — 
that the prospects of the laborer in the future of industry, in 
comparison with his present condition, were actually brighter 
than those of the receiver of profit. But any such inference 
from the doctrine in question would imply a very gross mis- 
apprehension of the facts of the case. It is perhaps as well 
to point out that the expressions "rate of wages" and "rate 
of profit " do not denote analogous facts with reference to the 
recipients of those two kinds of income. The rate of real 
wages expresses, so far as the laborer derives his income from 
wages, his actual material condition ; but the " rate of profit " 
gives no clue to the position, in this respect, of the capitalist. 



282 PRACTICAL DEDUCTIONS. 

A very low rate of profit is compatible, and in fact generally 
co-exists, with very great wealth among those who derive their 
income from this source. The explanation lies of course in 
the fact that the income of this class is measured, not by the 
rate of profit, but by this multiplied by the amount of their 
capital, and that this last factor may increase to any extent 
r- whatever. ISTothing, therefore, can be inferred from the tend- 
ency of profits to a minimum as to any limitation on the 
growth in wealth of those who live upon profits; while, on 
the other hand, the limitations on the advance of wages imply 
limitations on the laborer's well-being. 

The possibilities of the laborer's position, accordingly — so 
long as he remains a mere laborer — must be considered as 
bounded by the possibilities of an advance in real wages. We 
have already seen the conditions on which this depends. Prof- 
its being at the minimum, real wages will advance with the 
productiveness of industry in producing such real wages — in 
producing, that is to say, the commodities of the laborer's con- 
sumption. As T have already remarked, these commodities 
are mostly commodities of raw produce, of which an augment- 
ed production always implies a resort to inferior sources of 
supply. Unless, therefore, the laborer would lose in the re- 
sort to such sources of supply what he has gained from the 
increased productiveness of industry, he must be content to 
impose a steady restraint on the increase of his numbers. And 
now I will make an extreme supposition on this subject: let 
us suppose the providence and self-denial of the masses of the 
people to be strengthened to such a point that the demand for 
food and other articles of their consumption can be satisfied 
without requiring a resort to any natural agents inferior in 
point of productiveness to those employed in the United 
States, what would be the effect on real wages of such an 
extreme control placed upon the natural tendency of popula- 
tion to increase ? Its effect would be to place laborers in this 



DISCOUBAGING PROSPECTS. 283 

country on an equal footing with laborers in the United States ; 
and this is the very utmost that, on the most extreme supposi- 
tion with regard to the control of population, could be expect- 
ed for the laboring classes, assuming them to continue mere 
laborers. The supposition, I need scarcely say, is absolutely 
Utopian. Nothing is more certain than that, taking the whole 
field of labor, real wages in Great Britain will never rise to the 
standard of remuneration now prevailing in new countries — a 
standard which after all would form but a sorry consummation 
as the final goal of improvement for the masses of mankind. 
We see, then, within what very narrow limits the possibilities 
of the laborer's lot are confined, so long as he depends for his 
well-being on the produce of his day's work. Against these 
barriers Trades-Unions must dash themselves in vain. They 
are not to be broken through or eluded by any combinations, 
however universal ; for they are the barriers set by Nature 
herself. I commend the consideration to those patrons of the 
laboring classes who encourage an exclusive reliance on Trades- 
Unionism, and would advance their interests by confining them 
to their present role. It was the opinion of M. Comte, as it is ^ 
that of his disciples, that the true ideal of industrial society — j 
the goal toward which all reforming effort should be directed \ 
— is a more and more complete and definitive separation of the 
laboring and the capitalist classes. The proper model for our 
industrial organization according to them is an army in which 
the capitalists are as the captains, and the laborers as the rank 
and file. I do not know whether the apostles of this creed 
have ever seriously thought out the consequences as regards 
the distribution of wealth of a regime of this kind ; but it 
would be worth their while to master at least so much Polit- 
ical Economy, before committing themselves to the discour- 
agement of movements which, so far as appears, offer to the 
laboring class the sole means of escape from a harsh and hope- 
less destiny. 



284 PRACTICAL DJ<:DVCTI0NS. 

§ 7. The conclusion to which I have been led by the line 
1 of argument developed above is precisely the opposite of that 
which the Positivists maintain. It appears to me that the con- 
dition of any substantial improvement of a permanent kind in 
the laborer's lot is that the separation of industrial classes into 
laborers and capitalists which now prevails shall not be main- 
tained ; that the laborer shall cease to be a mere laborer — in 
a word, that profits shall be brought to re-enforce the Wages- 
fund. I have shown that, in order to any improvement at all 
of a permanent kind, a restraint must be enforced on popula- 
tion which shall prevent the increased demands for subsistence 
from neutralizing the gains arising from industrial progress ; 
and that even a very great change in this respect in the habits 
of the people — a change far greater than there are any good 
reasons for anticipating — would still leave them, while they 
remain mere laborers, in a position not very materially better 
than at present. But the significance of these considerations 
becomes much enhanced when they are connected with anoth- 
er doctrine established in a former chapter of this work. It 
was there shown that, in the order of economic development, 
the Wages-fund of a country grows more slowly than its gen- 
eral capital.* Now the Wages -fund of a country represents 
the means of the laboring classes as a whole ; the general capi- 
tal the means of those who live upon profit— we may say 
broadly of the richer classes. It appears, therefore, that the 
fund available for those who live by labor tends, in the prog- 
ress of society, while growing actually larger, to become a con- 
stantly smaller fraction of the entire national wealth. If, then, 
the means of any one class of society are to be permanently 
limited to this fund, it is evident, assuming that the progress 
of its numbers keeps pace with that of other classes, that its 
material condition in relation to theirs can not but decline. 

* See ante, pp. 176, 177. 



SOCIALISTIC SCHEMES. 285 

Now, as it would be futile to expect on the part of the poorest 
and most ignorant of the population self-denial and prudence 
greater than that actually practiced by the classes above them, 
the circumstances of whose life are so much more favorable 
than theirs for the cultivation of these virtues, the conclusion 
to which I am brought is this, that, unequal as is the distribu- 
tion of wealth already in this country, the tendency of indus- i^ 
trial progress — on the supposition that the present separation 
between industrial classes is maintained — is toward an inequal- 
ity greater still. _The_rii^ will be growing richer; and the 
poor, at least relatively, poorer. It seems to me, apart alto- 
getheFTrom the question of the laborer's interest, that these 
are not conditions which furnish a solid basis for a progressive 
social state ; but, having regard to that interest, I think the 
considerations adduced show that the first and indispensable 
step toward any serious amendment of the laborer's lot is that 
he should be, in one way or other, lifted out of the groove in 
which he at present works, and placed in a position compatible 
with his becoming a sharer in equal proportion with others in '^' 
the general advantages arising from industrial progress. 

In the conclusion just expressed I believe I shall have the 
concurrence of many who would probably attach little value 
to the reasoning by which I have been led to it. In all so- 
cialistic schemes for the elevation of the working-man, the 
necessity of raising him from the position of a mere laborer is 
generally taken for granted. I am,_ tbei:efbre,.0Ji this point at 
one w ith the Socialists ; but while I agree with them so far, I 
am wholly unable to accept the means which Socialism pro- 
poses for effecting the required elevation. The leading idea 
in most schemes of socialistic reform is the notion of raising 
laborers from dependence on the labor market by throwing on 
society, in the person of the State, the duty of providing them 
with capital. Now by whatever means it is sought to give 
effect to this idea — whether through the mechanism of a State 



A' 



28Q PRACTICAL DEDUCTIONS. 

bank issuing loans in inconvertible legal-tender notes, or by 
special taxation directed against the rich, or by advances made 
to laborers without adequate security or on terms more favor- 
able than can be obtained in the market* — one and all, they 
are open to the objection of doing violence to the principle 
of property, the weight and scope of which objection I have 
already sufficiently insisted on. But this is not all. Such 
schemes tend in the most direct way to the demoralization of 
the laborer himself, by relieving him from the obligation of 
sacrifices which, in the order of nature, all must undergo as 
the condition of the rewards which attend on industry, and so 
placing him in a position of privilege in relation to his fellow- 
men. If laborers can obtain command of capital by simply 
asldng for it; or if, having failed in their undertakings, they 
are to be relieved from the consequences of failure, and to be 
started anew in fresh enterprises, it is idle to expect that they 
will exhibit the self-denial and providence through the exer- 
cise of which capital comes to exist and industrial enterprise 

* It may be said that this principle has already been set aside in favor of other 
classes than laborers. This is true ; and I am not concerned to defend such vio- 
lations of the rule of justice and of sound policy. One recent example, however, 
of the practice of making advances for industrial purposes on terms more favor- 
able than can be obtained in the market — I refer to what ai-e known as " the 
Bright clauses" in the Irish Land Act of 1870 — may, I think, be justified on spe- 
cial grounds. I need not enter into the general argument here ; but it is scarcely 
likely that any set of workmen, unable from their own resources to start a co-op- 
erative enterprise, would be capable of furnishing the State with the same security 
for the money advanced, or with the same evidence of their industrial capacitj', 
which must be furnished by every Irish tenant who is in a position to take ad- 
vantage of the "Bright clauses." How little any such deviation from sound 
principle is called for in the present case is strikingly shown in the past history of 
co-operation. " It can not," says Professor Fawcett, "be too carefully borne in 
mind that those who have achieved the most striking success in co-operation have 
not been assisted by any extraneous aid. They have placed their chief reliance 
in union of effort, in prudence, and in self-denial " (" Manual of Political Econo- 
my,"?. 279). . 



THE PRACTICAL PROBLEM. 287 

to succeed. The practice of those virtues would still, indeed, 
be the condition of attaining the industrial results; but the 
virtues, if practiced at all when the motives for practicing 
them had been taken away, would be practiced by one set of 
people, and the results reaped by another. Unsatisfactory as - 
may be the actual state of things, I can not believe that this 
would be an improvement on it. As matters now stand, the 
progress of the laborer is at least connected with the exercise 
of industrial virtues; he only reaps where he has sown; but 
under a system in which he would find himself supplied at 
will with capital, the fruits of others' savings, what would 
there be to develop prudence or self-restraint? What motive 
for setting bounds to the most reckless self-indulgence. 

§ 8. The problem, therefore, for those who accept the point 
of view here taken, is to combine the socialistic aim with 
means for giving it effect consistent with the maintenance of 
the fundamental bases of our present social state — to help the 
laborer to emerge from his actual position without doing vio- 
lence to the principle of property, and without weakening in 
him those qualities of character on which industrial success 
depends. Keeping this object in view, I think it should at the 
outset be clearly laid down that there is no royal road to the 
possession of capital. Capital can only be created by saving, 
and, where people have not saved themselves, can only be hon- 
estly obtained by offering to those who have saved an ade- 
quate inducement in the form of security and interest to pre- 
vail on them to part with it. If, then, the laborer is to emerge 
from his present position and become a sharer in the gains of 
capital, he must in the first instance learn to save. To make 
saving practicable, it is true, there must be a margin of income , 
beyond what is required for providing the necessaries and de- 
cencies of life; and I shall perhaps be told that this margin 
the laborer does not possess. But this is an assertion which 



288 PRACTICAL DEDUCTIONS. 

can not for a moment be maintained in presence of the evi- 
dence furnislied by our Excise returns. From these returns 
it has been calculated that a sum of no less than £120,000,000 
sterling is now spent annually on alcoholic drinks. In what 
proportion the working-classes take part in this expenditure 
we have no means of accurately determining; but I imagine 
it will not be disputed that by much the largest proportion 
must be set down to their account ; and I am certainly within 
the mark in assuming that of the money so spent the greater 
portion — I am sure I might say three-fourths of the whole — 
so far from conducing in any way to the well-being of those 
who spend it, is both physically and morally injurious to them. 
Here, then, is a sum of, let us say, some £60,000,000 sterling 
which might annually be saved without trenching upon any 
expenditure which really contributes to the laborer's well-be- 
ing. The obstacles to this saving are not physical, but moral 
obstacles ; and supposing laborers had the virtue to overcome 
them, the first step toward what might be fairly called their 
industrial emancipation would already have been accomplish- 
ed. This indeed would be only the first step, and formidable 
difficulties would still remain. For, the capital being saved, 
it would need to be invested, and invested in undertakings 
which would yield at least the existing rate of profit, since we 
can not suppose that less than this would be regarded as suf 
ficient compensation for sacrifices, in the case of the laboring 
classes, considerably greater than those which the present rate 
remunerates. To obtain, however, such a rate of return, mere 
monetary investment — advances, I mean, on loan to persons 
giving adequate security — manifestly would not suffice. The 
rate of interest on such loans at present rarely rises much be- 
yond four or five per cent. With some £60,000,000 annually 
thrown upon the market as an addition to our present loan 
capital, it is probable the rate would fall to one or two per 
cent. — a return ridiculously inadequate as compensation fof 



CO-OPERATION THE SOLE ESCAPE. 289 

the sacrifices "wbicli saving would impose on the working-man. 
It would, therefore, be necessary that the new capital should 
be invested directly in industrial operations; and here a new- 
difficulty presents itself. The savings of working-men would 
necessarily in the individual case be small : the capital arising 
from such savings, therefore, however large in the aggregate, 
would be held in small portions by a very numerous class. 
But we know that, for the great majority of industrial under- 
takings, a large scale of production is the condition of efficiency. 
How, then, is this condition of efficient industry to be reconciled 
with the existence of a capital diffused throughout the commu- 
nity in minute independent portions? Obviousl}' there is but 
one way possible : those minute independent portions must be 
made to coalesce into masses large enough to furnish the means 
of efficient action. In other words, our reasoning brings us to 
this conclusion, that what is known as "co-operation" — the 
contribution by many workmen of their savings toward a com- 
mon fund which they employ as capital and co-operate in turn- 
ing to profit — constitutes the one and only solution of our 
present problem — the sole path by which the laboring classes 
as a whole, or even in any large number, can emerge from 
their condition of mere hand-to-mouth living, to share in the 
gains and honors of advancing civilization. 

§ 9. To say this, however, is by no means to say that the 
laboring classes, as a whole, are now prepared to enter on this 
path, or that any very great change in our modes of carrying 
on industry can soon or easily be effected. I am far, indeed, 
from thinking so. But here again I desire to point out that 
the obstacles in the way are not physical, are not even econom- 
ic, but moral or intellectual ; or, if economic, only in so far as 
economic results depend on intellectual and moral conditions. 
What workmen have to overcome in order to ensjasfe effect- 
ively in co-operative industry is, first, the temptation to spend 

19 



290 PRACTICAL DEDUCTIONS. 

their means on indulgences generally pernicious, and which 
at all events may without detriment be dispensed with ; and, 
secondly, the obstacles incident to their own ignorance and 
generally low moral condition. In using this language I have 
no desire to underrate the remarkable progress which a con- 
siderable section of our artisan population have already made 
toward fitting them for taking part in a system of co-operation ; 
and in connection with this subject I may refer to the very 
satisfactory evidence adduced by Professor Fawcett, in the last 
edition of his "Manual of Political Economy," of the recent 
progress of the co-operative movement — evidence which fully 
justifies the opinion he expresses, that "any one who considers 
what it has already effected, and what it is capable of doing in 
the future, must, we think, come to the conclusion that we may 
look with more confidence to co-operation than to any other 
economic agency to improve the industrial condition of the 
country."* There can be no question, therefore, that even at 
the present moment there is a considerable section of the work- 
ing population already ripe for co-operation ; though I fear it 
must be acknowledged that among the best of them there is 
much still to be learned, more particularly as regards the qual- 
ities of mutual trust, forbearance, and submission to the guid- 
ance of those to whom they may assign the management of 
their joint concerns. With regard to the masses, however, it 
is but too obvious that every thing has yet to be done. In the 
first place, habits of saving have to be created, and, in the next, 
the intelligence, and still more the moral qualifications, required 
for effective co-operative action have to be developed. The 
difficulties, I admit, are great, but I can not see that they are 
insuperable ; and this, as Professor Fawcett has shown, is as- 
suredly not a time for the friends of co-operation to despair ; 
for though it be true that such success as co-operation has 

* "Manual of Political Economy," fourth edition, p. 279, 



PROSPECTS OF CO-OPEEATION. 291 

achieved in this country has been almost exclusively confined 
to the comparatively simple problems of distributive industr}', 
the experience and training acquii-ed in these tasks will help 
to qualify for more serious undertakings. Nor is it irrelevant 
to remark that we have just established, or at least, it is to be 
hoped, are on the eve of establishing, a sj'stem of universal 
compulsory education, from which it is surely not extravagant 
to expect that substantial improvement in the laborer's charac- ' 
ter will in due time accrue. 

The all-important point, as it seems to me, is to recognize i 
the direction in which the emancipation of labor from what is \ 
called (absurdl}' enough) the tyranny of capital lies. This I -' 
repeat is, and, so far as I see, can only be, that of co-operative 
industry. It is of course open to any one to question the 
feasibility of the plan ; to such doubts the only effective an- 
swer, and it has already to some extent been given, will be 
actual performance; but what I think the foregoing argument ■_ 
establishes is that the alternative lies between this plan and ' 
none. If workmen do not ris^ from dependence upon capital 
by the path of co-operation, then they must remain in depend- 
ence upon capital ; the margin for the possible improvement 
of their lot is confined within narrow barriers which can not 
be passed, and the problem of their elevation is hopeless. As 
a body, they will not rise at all. A few, more energetic or 
more fortunate than the rest, will from time to time escape, 
as they do now, from the ranks of their fellows to the higher 
walks of industrial life, but the great majority will remain sub- 
stantially where they are. The remuneration of labor, as such, 
skilled or unskilled, can never rise much above its present 
level. 

§ 10. Before quitting the subject of co-operation there is an 
aspect of the case on which I would offer a few concluding re- 
marks. It may be asked, supposing a regime of co-operative 



292 PRACTICAL DEDUCTIONS. 

industry established, does it follow that the future of the work- 
ino'-raan is assured ? Such a regime would indeed bring profits 
to the aid of wages, and thus largely increase the fund availa- 
ble for his support; but that fund, after all, would have limits; 
the means of subsistence could not be increased as fast as hu- 
man beings could multiply; and at bottom the great Malthu- 
sian difficulty would remain. Could workmen in their altered 
position be trusted to keep their numbers within the limits 
which the conditions of prosperous existence inevitably and 
under all circumstances prescribe? 

Let me say that I am far from disposed to underrate the 
gravity of the consideration here adduced ; but, while fully 
conceding the danger, it seems to me that we may yet find 
grounds for hopefulness in two circumstances: first, the fund 
for the laborers' support would, under a regime of co-operation, 
be derived, not as at present, exclusively from the Wages-capi- 
tal of a country, but from the general capital in all its forms. 
Now we have seen that, in progressive communities, the gen- 
eral capital grows more rapidly than the Wages-capital ; from 
which it follows that, under a regime of co-operation, the fund 
from which the laborer derives his support would not only be 
greatly larger than the corresponding fund under our present 
system, but would be a more rapidly increasing fund. Al- 
though, therefore, the necessity for restraining population would 
continue under co-operation as under all systems of industry, 
the restraint would not need to be as severe as it is when the 
laborer's resources are restricted to the most slowly growing 
portion of the whole national capital. The Malthusian diffi- 
culty, therefore, would not be removed by co-operation, but 
it would become, under that system, greatly less formidable. 
But, secondly, as w^e have seen, successful co-operation requires, 
and therefore presupposes, qualities of character which are not 
to be found at present in the masses of the laboring people — 
a capacity of self-denial, a tendency to look forward, and to 



AX OBJECTION ANSWERED. 293 

attach increased importance to the future as compared with the 
present — in a word, self-control and prudence. Now these 
qualities once developed in a human being do not operate ex- 
clusively in any one direction : they affect his whole character, 
and will manifest their influence on his conduct in his matri- 
monial and domestic relations, as well as in every other part 
of his life. For this reason I am inclined to attach much more 
importance, as a means of controlling population, to the crea- 
tion of modes of existence or habits of life in which the pru- 
dential faculties are called into energetic play, than to any 
amount of direct Malthusian teaching. No doubt the plain 
truth on this subject should always be spoken ; but, unless ac- 
companied with changes in the workman's condition which 
should at once make his obligations clearer to himself and also 
fortify him for their performance, I must own I should have 
little faith in its practical efficacy. As matters stand now — 
with the mass of the laboring population in absolute depend- 
ence on the labor market — is it any wonder that Malthusian 
prophets are as a voice crying in the wilderness? What do 
the majority of laborers know of the conditions determining 
the labor market? The demand for labor seems to come and 
go, like the wind blowing where it listeth, but those whose for- 
tunes are governed by its changes know as little as they do of 
the wind, whence it cometh or whither it goeth. Why, they 
naturally ask in this state of ignorance, should they deny them- 
selves for the sake of their children ? Is it not all an affair of 
chance? and will not their children's chances be as good as 
theirs? Why, then, forego such enjoyment as the present of- 
fers for the sake of a future which is wrapped in clouds ? 

" The present moment is their own : 
Tlie next they never saw." 

On the other hand, co-operation, while it appeals in the strong- 
est way to those attributes of character which are concerned in 



294 PRACTICAL DEDUCTIONS. 

the control of population, makes comparatively definite and 
clear the limits of the laborer's resources. He is now a payer 
as well as a receiver of wages, and, seeing the wages problem 
from both sides, is likely to acquire juster views; but, even 
though wages should still remain a mystery, at least it will be 
tolerably clear that profits will grow with the growth of capi- 
tal, and that each, man may count on receiving them precisely 
in proportion to the amount of capital he can command. Sup- 
posing a workman to have achieved comfortable independence, 
it will be clear to him that to maintain it he must maintain 
his capital unimpaired ; and that to incur responsibilities which 
should compel him to encroach upon his capital to meet cur- 
rent expenses would be tantamount to a deliberate descent in 
the scale of well-being. The position of the co-operator would 
in this respect be analogous to that of the peasant proprietor, 
who, like him, draws his subsistence from a tolerably definite 
fund, and generally contrives to keep the expenses of his 
household within the limits which that fund will support. In 
these circumstances, it seems to me, there is good ground for 
hopefulness. Co-operation at once renders less formidable the 
obstacles to human improvement inevitably incident to our 
animal propensities, and tends to develop, in those who take 
part in it, a type of character fitted in a high degree for en- 
countering them with success. 



I'^RT III. 

INTERNATIONAL TRADE, 



P^RT III. 

INTERNATIONAL TRADE, 



CHAPTER L 

DOCTRINE OF COMFAKATIVE COST. 

/_§ 1. It has been usual hitherto in treatises on Political 
Economy to consider the subject of international trade and 
international value, apart from the general theory of exchange 
and exchange value, as a distinct branch of economic doctrine; 
but the question has been lately raised whether this method 
of exposition is scientifically warrantable — whether, that is to 
say, it does not suggest a false view of the phenomena of com- 
merce by implying a distinction in principle where in reality 
no such distinction exists. Assuming that the objection thus 
taken to the separate treatment of international trade is not a 
merjjqaibble_on_the use of the term " international," but in- 
tended to apply to the substance of economic theory as com- 
monly expounded, the question raised by it is one as to the 
nature of the phenomena embraced by international trade, and 
what we have to decide is whether those phenomena are such 
as to find their solution in the same theory of exchange which 
furnishes the explanation of the facts of domestic commerce. 
In the event of their finding their solution in that theory, it is 
evident that the objection taken to the ordinary mode of expo- 
sition is well founded ; while, in the opposite case, it is equally 
clear that the phenomena of international trade have need of a 
special theory for their satisfactory elucidation. 



298 DOCTRINE OF COMPARATIVE COST. 

In order to determine this point, it will be well if we en- 
deavor here to set before our minds in the most general way 
the fundamental circumstances on which trade, or the inter- 
change of commodities, in all its forms, rests. These funda- 
mental circumstances are to be found in the consequences aris- 
ing from division of labor or separation of employments. In 
order that industry may be carried on upon this plan, and that 
advantage may be taken of the increased efficiency and econo- 
my thence resulting, the exchange of products among those 
carrying on the separated occupations becomes necessary, and 
in this fact we find the natural basis and explanation of trade. 
Trade, therefore, is the necessary means of giving effect to the 
separation of employments^ and the advantages arising from it 
are the advantages incident to this scheme of things. The 
general nature of these advantages is familiar to all readers of 
economic works ; but for our present purpose it will be conven- 
ient to consider them under two leading heads -./first, we may 
Iconsider those advantages which arise from the separation of 
'employments, apart from any special circumstances which may 
give to this arrangement a peculiar importance; and, secondly, 
jthose which are due to the separation of employments, as fur- 
nishing the means of developing special faculties of production 
possessed by particular persons or places. \ As an example of 
the former class of advantages we may take the ordinary hand- 
icraft trades. There is an obvious advantage in having such 
employments as tailoring, boot-making, hat-making, and the 
various callings of blacksmith, locksmith, mason, joiner, etc., 
separated and carried on as distinct occupations; but, as most 
of them require the same, or nearly the same, sort of qualifica- 
tions for their performance, it makes little difference to which 
of the group any particular member of the handicraft class de- 
votes himself. A is a tailor, B a shoe-maker, and C a hatter; 
but if C had been a tailor, A a shoe-maker, and B a hatter, 
the arrangement would probably have answered equally well. 



SPECIAL PROVINCE. 299 

Nothing is here gained from the separation of employments 
beyond the increased dexterity incident to the increased famil- 
iarity of each workman with his work, together with the sav- 
ing of so much time as would be wasted if the laborer had oc- 
casion frequently to change his occupation. This, then, is one 
description of advantage arising from the separation of employ- 
ments to the realization of which trade ministers. But, as I 
have said, this advantage may be combined with advantages 
of another kind, and this happens where the separation of em- 
ployments, while promoting the results just noticed, furnishes, 
at the same time, the means of developing the special capacities 
or resources possessed by particular individuals or localities. 

In the examples given above the advantage obtained was 
derived from the mere fact of the separation of employments, 
altogether independently of the mode in which the separated 
emplo3'ments were distributed among the persons carrying 
them on, as well as of the places in which they were conduct- 
ed. But a further gain arises when the employments are of 
a kind which, in order to their effective performance, call for 
special capacities in the workman or special natural resources 
in the scene of operation. There would be a manifest waste 
of special power in compelling to a mere mechanical or routine 
pursuit a man who is fitted to excel in a professional career; 
and similarly, if a branch of industry were established on some 
site which offered greater facilities to an industry of another 
sort, a waste, analogous in character, would be incurred. In 
a word, while a great number of the occupations in which men 
engage are such as, with proper preparation for them, might 
equally well be carried on by any of those engaged in them, 
or in any of the localities in which they are respectively es- 
tablished, there are others which demand for their effective 
performance special personal qualifications and special local 
conditions; and the general effectiveness of productive indus- 
try will, other things being equal, be proportioned to the com- 



300 DOCTBINE OF COMPARATIVE COST. 

pleteness with wbich the adaptation is accomplished between 
occupation on the one hand and individuals and localities on 
the other. 

There are thus two distinct kinds of advantage derivable 
from the separation of employments ; and I have called atten- 
tion to this circumstance in order to say that it is one only of 
those sorts of advantage that international trade in the main 
tends to develop. The great trades of the world are carried 
on between countries pretty widely removed from each other 
either in the scale of civilization or in respect to their natural 
resources and productions, while in proportion as countries ap- 
proximate to each other in natural resources or in the indus- 
trial qualities of their inhabitants, the scope for international 
trade is narrowed : it is even possible that it should fail alto- 
gether. The reason of this is by no means mysterious. The 
advantage to be derived from the separatioii of employments, 
where this separation is not connected with any special facil- 
ities of production, are, in countries in which industry has 
made any considerable progress, in general realized in their 
full extent by the separation which takes place within the 
limits of each of those countries. It is only when population 
is very sparse that the home market is not large enough to 
secure this result; and where this is so, it generally happens 
that any gain that might be obtained through a trade with 
foreign nations in articles in the production of which no spe- 
cial facilities, positive or comparative, are possessed by the 
trading countries, is more than counterbalanced by the loss in- 
cident to an increased cost of carriage. Accordingly in coun- 
tries or districts which are very sparsely peopled, instead of 
the separation of employments in the simpler industries being 
carried out by an interchange with foreign nations, what usu- 
ally happens is that no separation of employments, or a very 
imperfect one, takes place, and that things continue in a prim- 
itive state. ( International trade may thus be considered as 



SPECIAL PROVINCE. 301 

practically restricted to giving effect to those examples of the 
separation of employment in which the more ordinary ad- 
vantages flowing from that principle are combined with those 
which are due to the adaptation of industrial operations to the 
special circumstances of persons and places; while again it is 
tolerably obvious that, of these two sorts of adaptation, that 
which relates to places is, in the international sphere, by muck/ 
the more important. The only case indeed in which personal 
aptitudes go for much in the commerce of nations is where the 
nations concerned occupy different grades in the scale of civili- 
zation. In the trade, for example, between England and In- 
dia it is probable that the different characters of the two peo- 
ples, incident to the different stage of social growth to which 
each has attained, go a considerable way in determining the 
character and the amount of their commercial dealings. But 
perhaps the most striking example which the world has ever 
seen of a foreign trade determined by the peculiar personal 
qualities of those engaged in ministering to it is that which 
was furnished by the Southern States of the American Union 
previous to the abolition of slavery. The effect of that insti- 
tution was to give a very distinct industrial character to the 
laboring population of those States, which unfitted them for 
all but a very limited number of occupations, but gave them 
a certain special fitness for these. Almost the entire industry 
of the country was consequently turned to the production of 
two or three crude commodities, in raising which the indus- 
try of slaves was found to be effective ; and these were used, 
through an exchange with foreign countries, as the means of 
supplying the inhabitants with all other requisites. This is, 
perhaps, the most noteworthy instance on record of personal 
aptitudes extensively affecting the external trade of a country. 
In the main, however, it would seem that this cause does not 
go for very much in international commerce. The principal 
condition, to which all others are subordinate, in determining 



302 BOCTEINE OF COMPARATIVE COST. 

the existence and character of foreign trade must be looked 
for in that other form of adaptation founded on the special ad- 
vantages, positive or comparative, offered by particular locali- 
ties for the prosecution of particular industries. 

Here, then, we have a well-defined characteristic which dis- 
tinguishes international trade from domestic ; but its presence 
alone would scarcely suffice to justify a special theory of the 
former. To satisfy ourselves on this point, we must advert to 
another circumstance to which I have now to call attention. 

One of the principal conditions determining the relative 
profitableness of particular occupations and the terms on 
which their products are exchanged consists in the degree 
of fticility which happens to exist for moving capital and la- 
bor from one to the other. /Now this facility is very different 
in the case of occupations carried on within the limits of a sin- 
gle country, and those carried on in different countries ; and in 
this difference is to be found the chief fact discriminating the 
'phenomena of international from those of domestic trade. 1 Let 

\ lis endeavor to appreciate in a general way the range and the 
degree of this difference. 

The assumption commonly made in treatises of Political 
Economy is that, as between occupations and localities within 
the same country, the freedom of movement for capital and 
labor is perfect, Iwhile, as between nations, capital and labor 

'^"^^move with difficulty or not at all. ■ In strictness neither mem- 
bec^jorjthia.jissumptiQn can,.he,.Jiiaintained, Capital, indeed — 
so long at least as it exists in the form of purchasing power 
available for productive purposes — moves freely among all 
occupations and places within the same country ; but labor, 
as we know, encounters impediments at certain points; the 
laborers belonging to the lower industrial grades being hin- 
dered by the circumstances of their position from entering 
into competition with those above them ; while even for la- 
borers occupying the same industrial stratum the obstacles to 



HINDEBANCES TO LOCOMOTION. 303 

mio-ration between distant localities are often verv considera- 
ble, and such as sometimes to amount to practical prevention. 
Nor any more is it true, without large qualification, that labor 
and capital do not move from country to country. Capital, in 
a certain sense, is every day becoming less national and more 
cosmopolitan ; and though labor is far from being equally mo- 
bile, still with the immense emigration taking place year after 
year from these islands and other countries of Western Eu- 
rope, and with the fact before us that even Asiatic popula- 
tions are now beginning to emigrate, it is impossible to deny 
that labor is capable, under the influence of economic causes, 
of international movement on a great scale. The assumption, 
therefore, in the unqualified form in which it is often laid 
down, can not be maintained either in its affirmative or in its 
negative part. But while so much must be freely admitted, 
it may still be affirmed that enough of truth remains in the as- 
sertion, after all due deductions have been made, to warrant 
the inferences that have been drawn from it, and to justify the 
distinction contended for. For it is by no means necessary to 
the truth of the doctrine, as it has been laid down, for exam- 
ple, by Ricardo and Mill, that there should be an absolute im- 
possibility of moving capital and labor from country to coun- 
try. What the doctrine requires is not this, but such a degree 
of difficulty in effecting their transference as shall interfere sub- 
stantially and generally — that is to say, over the whole range 
of the commodities exchanged — with the action of industrial 
competition.* The one and sufficient test, as I have pointed 

* The reader will here bear in mind the sense in which I use the phrase " in- 
dustrial competition," as expressing the competition which takes place between 
the producers of different commodities — competition which tends to bring wages 
and profits into correspondence with the sacrifices undergone, in contradistinction 
to that which takes place between dealers in the same commodity and which oper- 
ates toward equality of price. The latter might be called ^^ commercial competi- 
tion.' 



304 DOCTRINE OF COMPABATIVE COST. 

out; of the existence of an effective industrial competition, is 
the correspondence of remuneration with the sacrifices under- 
gone — a substantial equality, that is to say, mailing allowance 
for the different circumstances of different industries, of profits 
and wages. Such a test, applied to domestic transactions, shows 
the existence of a very large amount of effective industrial com- 
petition operative throughout the various industries carried on 
within the limits of a single country. The competition of dif- 
ferent capitals within such limits may be said to be universal- 
ly effective; and that of labor, though interrupted at certain 
points, is effective over large industrial areas. Profits conse- 
quently within the same country, however great may be the 
fluctuations, gravitate steadily toward a common level, as like- 
wise do wages within the limits of the industrial areas to which 
I have referred. The same test applied to international trans- 
actions shows an entirely different state of things. VFor, though 
capital migrates, it does not do so upon a scale large enough 
to establish an equality of profits in different countries, and 
profits consequently remain at a permanently higher level in 
some countries than in others. ; Indeed, in spite of all we hear 
of the international movements of capital, the amount of cap- 
ital that can be truly called cosmopolitan — disposable for in- 
vestment in countries other than that to which it properly be- 
longs — is after all but a mere fraction of the national capital. 
It is in effect confined to a portion of what is called the "float- 
ing capital" of a country — that part of the capitalist's funds 
which he does not mean to superintend himself, and which 
he offers on loan. All that immensely larger part which the 
owners are not disposed to part with, but desire to superin- 
tend and work themselves — all this is practically confined to 
the capitalist's country. What passes off*, though often con- 
siderable in its positive amount, is thus wholly unequal to 
producing a sensible impression on the general rate of prof- 
it in the country to which it goes; and so profits remain 



HINDERANCES TO LOCOMOTION. 305 

permanently at different levels in different countries. And 
just as little has an equilibrium in the rates of wages been 
brought about by the international movements of labor. Great 
as has been the emigration from Europe to the United States, 
it may be doubted if, outside the range of a few towns on the 
eastern coast, any appreciable effect has been produced on the 
rates of wages in the latter country. Throughout the Union 
wages remain in all occupations verj'- considerably higher than 
in the corresponding occupations in this country. Nor do they 
show any sign of declining. It thus appears, alike with regard 
to labor and capital, that notwithstanding a certain amount of 
international mobility in these instruments of production, the 
impediments to their transference from country to country are 
yet sufficiently great to prevent effective competition from tak- 
ing place between the industries of different countries, such as 
is really operative in each separate country over a very large 
proportion of its domestic industry. And this, and no more 
than this, is all that is assumed by economists — all at least that 
is essential to the validity of their arguments — when they con- 
tend for the necessity of separating the facts of international 
from those of domestic trade. 

§ 2. It will aid us in giving the due circumscription to the 
facts with which we have to deal if, before developing the con- 
sequences involved in the state of things just described, we 
note briefly the nature of the obstacles which impede the move- 
ments of labor and capital in the international sphere. The 
most important of these are the following: 1. Geographical dis- 
tance; 2. Difference in political institutions; 3. Difference in 
language, religion, and social customs — in a word, in forms of 
civilization. Each of these circumstances is capable of hinder- 
ing, and does in fact, to a greater or less extent, hinder the free 
movement of labor and capital. As regards their relative im- 
portance, the social and political causes are probably, in the 

20 



306 DOCTRINE OF COMPARATIVE COST. 

present state of the world, more powerful than the physical, 
more particularly when the former happened to be connected 
with differences of race ; while geographical distance is appar- 
ently that which exerts the least obstructive force. 

These being the principal obstacles to the movements of la- 
bor and capital from place to place, it will be at once apparent 
that the line of demarkation which would result from their 
interference, though largely coincident with that indicated by 
the words "international" and "domestic," is by no means 
strictly so. Australia and Canada, for example, are portions 
of a single political system, but the geographical obstacles of- 
fered to trade between those places, or between either of them 
and England, are far greater than those which exist in the 
trade of many independent nations ; and the same may be said 
of the trade between the Atlantic and the Pacific States of the 
American Union. Similarly, we find within the same country 
differences of race, of language, and of religion, and to some 
extent of social tastes and habits. It is thus clear that no hard 
and fast line can be drawn between domestic and international 
trade founded on the character of the obstacles presented to 
the movements of labor and capital ; and it must, therefore, be 
owned that the terms " international " and " domestic " do not 
accurately express the distinction which it is designed to mark. 
What we want is a term which would cover all that portion 
of the trade of mankind carried on between localities sufficient- 
ly separated from each other, whether by moral or physical 
obstacles, to prevent the action, as between producers in the 
trading localities, of effective industrial competition, and which 
would exclude the trade carried on under those more favorable 
conditions where industrial competition is effective. So far as 
I know, there is no one word that accurately meets this require- 
ment. " International " is that which perhaps comes most near- 
ly to what we want. In the intercourse of independent nations, 
all or most of the obstacles I have noted come into operation, 



CONSEQUENCES WHICH RESULT. 307 

and in their combination offer a substantial impediment to the 
free movement of capital and labor; wliile, as among different 
localities in the same country, they do not exist in the same 
number or in the same degree of intensity, and, where they do 
exist and operate, they are always counteracted and largely 
neutralized by the powerfully assimilating influence of a single 
central government. In the case of colonies, however, the po- 
litical causes tending to facilitate the movements of capital 
and labor are, on the whole, overborne by the geographical, cli- 
matic, and physical circumstances which obstruct those move- 
ments; and therefore, for the purposes of economic theory, we 
must include colonial under " international " trade. Our eco- 
nomic nomenclature in this part of our subject is thus not free 
from objection; but, having noted its imperfection, we shall 
not be likely to be misled by it. 

§ 3. We have now ascertained the grounds in the facts of 
the case for the distinction between "international" and "do- 
mestic" trade, and the sense in which these terms are to be 
understood. It remains that we endeavor to trace the conse- 
quences which result in the trade of nations from the circum- 
stances, such as they have been shown to be, under which it 
takes place. 

First among these consequences we may note the following: 
A trade may arise between two independent countries and 
be profitable for each under conditions in which it would not 
arise if the trading localities were within the range of a single 
countr}'-, that is to say, if they were so situated that labor and 
capital moved freely between them. To perceive the grounds 
of this statement, we may consider the following case. Sup- 
pose a trade between North Wales on the one side and Lan- 
cashire and Yorkshire on the other, the articles exchanged be- 
ing slates on the part of North Wales against woolen and cot- 
ton manufactures on the side of the English counties. North 



308 DOCTRINE OF COMPARATIVE COST. 

Wales has evidently a great and unquestionable advantage 
over Yorkshire and Lancashire in the production of slates; 
and it is probable that Yorkshire and Lancashire have an ad- 
vantage, less decided, but still real, over North Wales in the 
production of their staple products. Of one thing at all events 
we may be sure : neither district is under a positive disadvan- 
tage, as compared with the other, in raising or manufacturing 
the product which forms the staple of its trade ; for, were this 
so, the product in question would no longer be produced in 
that locality : the capital and labor employed in the business 
would migrate thence to the other locality, which offered 
greater advantage for the production of this article, and the 
trade between the places would cease. In a word, a migration 
of the instruments of production would take the place of a 
trade in the products. This is what would happen when the 
trading districts are situated within the same country, and la- 
bor and capital move freely between them. But now suppose 
the trading localities to be situated in different countries, be- 
tween which labor and capital move with difficulty, or not at 
all. Under such circumstances either might have an advan- 
tage over the other in respect of all the staples of their trade — 
in the case supposed in respect to textile fabrics as well as to 
slates — and the trade might nevertheless go on ; for, though it 
is true that here too, as in the case just considered, there would 
be a gain in productive efficiency if the people and capital of 
the less favored district were to transfer themselves bodily to 
the other, yet, as in point of fact this transference, for very 
sufficient reasons, does not take place, the question arises what, 
under these circumstances, will be most for the interests of the 
two countries in supplying their needs by means of industry? 
A very little consideration is needed to show that, under the 
circumstances supposed — the superiority in productive power 
lying in the case of every branch of industry on the side of 
one country — it may yet be for the interest of both to satisfy 



MODE OF ITS ACTION. 309 

their wants by engaging in trade, j^rovided only thai the advan- 
tage enjoyed by the country possessing the superior industrial re- 
,sources he not equally great in each instance; (in other words, 
provided that each country possesses, in respect to the other, 
a greater advantage or a less disadvantage in the production 
of some than in that of other commodities, j If, for example, it 
happened that North Wales and the manufi^cturing districts 
of England were situated in independent countries between 
which labor and capital refused to pass, under these circum- 
stances North Wales might have an advantage over the En- 
glish counties both in the production of slates and also in the 
production of textile fabrics; but if her superiority was not 
the same in both — if it were greater in the case of one than in 
that of the other class of commodity — greater, say, in the case 
of slates than in that of cloths, it would still be for the inter- 
est of the two districts to trade in those articles; for Wales, 
by devoting her industry to the production of slates, in which 
her superiority was greater than in the production of cloths, 
and using her slates as the means through trade of procuring 
cloths, would get them cheaper — with less real cost of labor and 
abstinence — than if she produced them; while, on the other 
hand, Yorkshire and Lancashire would get their slates cheaper 
by employing their industry in the production of fabrics in 
which their disadvantage was less, and using these as the means 
of obtaining their slates from Wales, than by attempting to pro- 
duce slates or any substitute for them directly for themselves. ) 
It thus appears that a trade may take place between two dis- 
tricts, as independent countries, under circumstances in which 
no trade would occur, were those districts situated within the 
limits of a single country, and capital and labor free to move 
between them. This, I say, is a possible case, and, as will pres- 
ently appear, in actual experience, a very common one ; indeed, 
it may be said to be typical of a large proportion of the entire 
trade carried on between independent countries. We are thus 



310 DOCTRINE OF COMPARATIVE COST. 

brought, in the domain of international trade, into contact with 
a phenomenon of which the theory of trade in its simpler cases 
furnishes no explanation, for which therefore a special theory 
is needed. The writer who first detected the fact, and sup- 
plied^ the theory, was Eicardo ; and the theory involved in the 
foregoing exposition is in effect that which he gave. It may 
be thus stated : }In order to the existence of a trade between 
different countries, the essential and also the sufficient condi- 
tion is, that there should be in those countries a difference in 
/the comparative cost of producing the commodities which are 
I the subject of the trade. The commodity forming the staple 
' of a trading country may be, and frequently is, more cheaply 
produced in that country than in the country which imports 
it, but this is not necessary to the existence of the trade ; and 
a trade between nations may be carried on where the superior- 
ity in point of productive power with respect to all articles 
which form the subject of the trade is upon the side of one of 
them. On the other hand, a diffei'ence in the absolute costjpf 
producing commodities in different countries does not neces- 
sarily render a trade between them possiblCj since, if the dif- 
ference were the same in the case of each article, there would 
be no motive for an exchange. The one condition, therefore, 
at once essential to, and also sufficient for, the existence of in- 
ternational trade, is a difference in the comparative, as contra- 
distinguished from the absolute, cost of producing the com- 
modities exchanged.*] 

Such is the theory of international trade as it was left by 
Eicardo, and expounded, but not substantially altered, by 
Mill.f It can not be doubted that it sounds the depths of the 

* Ricardo's Woi-ks (M'CuUoch's edition), chap. vii. ; Mill's "Principles of Po- 
litical Economy," book iii., chap. xvii. 

t I say, the theory of international trade was not substantially altered by Mill : 
the theory of international values was ; Mill having here supplied an important 
condition overlooked bv Ricardo. 



EXPLANATION OF TEBMS. 311 

problem, and embraces in its scope all the most important — 
certainly all the most conspicuous — facts in the sphere of in- 
ternational dealings. Nevertheless, as I shall presently at- 
tempt to show, thejloctrine as it stands is not absolutely com- 
plete, and in fact fails to take account of certain international 
exchanges, not perhaps very extensive in their range, but still 
of considerable importance. Such criticisms, however, as I 
have to make upon this point will be more conveniently re- 
served for another chapter. For the present I shall confine 
myself to a few further remarks in elucidation of the doctrine 
as it has been stated above. 

[And, first, it must be observed that by "cost of production," 
as employed in the foregoing context, the reader is to under- 
stand the actual difficulties of production as measured by the 
sacrifices which production requires, not the amount of wages 
and profits, whether measured in money or produce, comprised 
in the capitalist's outlay and return J It was in the former 
sense that Ricardo, who first discovered the truth in question, 
understood the words, and, notwithstanding that Mr. Mill has 
in his chapters on Value adopted the latter conception of cost 
of production, it is in the same sense that he has employed it 
in his exposition of the doctrine of international trade.'"" In- 
deed, it may be doubted if the theory of comparative cost of 
production as the ruling principle of international trade could 
ever have been worked out from the point of view which re- 
gards cost as consisting in wages and profits ; and, however 
this may be, it is at least quite certain, as I shall hereafter 
demonstrate, that the theory of international values, adopted 

* The only sacrifice taken account of by either Eicardo or Mill in working out 
the theory of international trade is that of labor, the cost being always reckoned 
in so many days' labor of so many men. Abstinence is entirely overlooked. The 
omission, liowever, does not seriously affect the reasoning, since labor and absti- 
nence being each alike a sacrifice, the considerations applicable to the one are, so 
far as the argument is concerned, for the most part applicable also to the other. 



312 DOCTRINE OF COMPARATIVE COST. 

alike by Mill and Eicardo, is absolutely irreconcilable with 
that view. 

\ SecQildjy, when it is said that international trade depends 
on a difference in the comparative, not in the absolute, cost 
of producing commodities, the costs compared, it must be care- 
fully noted, are the costs in each country of the commodities 
which are the subjects of exchange, not the different costs of 
the same commodity in the exchanging countries.] Thus, if 
coal and wine be the subjects of a trade between England and 
France, the comparative costs on which the trade depends are 
the comparative costs of coal and wine in France as compared 
with the comparative costs of the same articles in England. 
England might be able to raise coal at one-half the amount of 
labor and abstinence needed in France ; but this alone would 
not render it profitable for France to obtain her coal from En- 
gland. ^ her disadvantage in producing other commodities 
was as great as in producing coal, she would gain nothing by 
an exchange of products, and the condition^ for a trade be- 
tween the two countries would not exist.^ But supposing she 
was, in the case of some other commodity, under a less disad- 
vantage than in that of coal, still more if she had with regard 
to that other — as in wine — a positive advantage, it would at 
once become her interest to employ this commodity as a means 
of obtaining through trade her coal from England, instead of 
producing coal directly from her own mines. 

So much in the way of explanation of terms. Let me now 
endeavor to set before the reader a few examples of the prac- 
tical working of the principle of comparative cost in the act- 
ual commerce of the world. For this purpose I shall take, in 
the first place, a case to which I have both in this and in for- 
mer publications frequently referred — the external trade of the 
principal Australian colonies before and since the discovery 
of the gold-fields. Previous to that discovery, which occurred 
in 1851, no gold being produced in the country, the cost to the 



PRACTICAL EXAMPLES. 313 

colony of such gold as circulated there would consist in the 
cost — by which tlie reader will bear in mind I mean the labor 
and abstinence — incident to the production of those articles 
by the exchange of which with foreign countries Australia ob- 
tained her gold. Certain quantities of wool, tallow, and hides 
were exported, and sold in foreign countries for certain sums 
of the precious metals, and these, or their equivalents in value, 
came back to the Australian producers, to whom they became 
wages and profits. These wages and profits, therefore, meas- 
ured in the precious metals, or, let us say, in gold, which was 
the standard of value in the colony, would be the return upon 
the labor and abstinence employed in producing the commod- 
ities through the sale of which they were obtained. In pro- 
portion as they were great, the cost of obtaining gold would 
be small; in proportion as they were small, the cost of obtain- 
ing gold would be great; in a word, the cost of obtaining gold 
would vary inversely with the money rates of wages and prof- 
its prevailing in the colony. Supposing, for example, that 45. 
a day was the wages of unskilled labor in the colony in 1850, 
and ten per cent, per annum the ordinary return upon capital, 
then the cost of gold, so far as it consisted of labor, would be 
a day's unskilled labor for 45. worth of gold, and, so far as it 
consisted of abstinence, a year's abstinence from the enjoyment 
obtainable by means of £100 for £10. For simplicity of illus- 
tration, as labor is so much the principal element in the case, 
we may confine our attention to it exclusively, and say brief- 
ly that the cost of gold in Australia previous to the gold dis- 
coveries was represented by a day's labor for as much gold as 
could be purchased with 45. Under these circumstances the 
gold discoveries took place; and now mark what happened. 
At once the same workman who previously by a day's labor 
could earn but 45. worth of gold could now by washing the 
auriferous sands earn from 155. to 205. worth. The same ex- 
ertion could now procure for him four or five times as much 



314 DOCTRINE OF COMPARATIVE COST. 

gold as formerly ; in other words, the cost of gold had fallen 
in the proportion of from four or five to one. But while the 
cost of gold in the colony was thus reduced, no change had 
taken place there in the cost of producing other things. A 
given exertion of labor and abstinence would still procure the 
same quantity as before of corn, of meat, of wool, of tallow. 
It followed that the comparative cost of producing gold and 
other things had been altered in the immense proportion indi- 
cated by the reduction in the positive cost of producing gold ; 
in other words, the conditions were realized under which, ac- 
cording to the theory of Eicardo, an immense change ought to 
take place in the external trade of the colon}'- ; and this was 
precisely what happened. From that time until the condi- 
tions of trade were again modified, partly through the gradual 
exhaustion of the richer gold deposits, and partly through 
the advance of prices in foreign markets, a period of some four 
or five years, Australia became an importer of every thing 
that from its nature admitted of being imported ; and, what 
is especially to be noted, among the things thus imported 
were many which she could have produced herself at far less 
cost, with far less labor and abstinence, than they were pro- 
duced at in the countries from which they were brought. 
For example, timber was imported from the Baltic, although 
there were forests in Australia capable of yielding timber 
quite good enough at least for the mining purposes for which 
timber was mostly required. Butter was largely imported 
from Ireland, and I believe also from England and Holland, 
though the advantages possessed by Australia for dairy farm- 
ing in her unrivaled pastures and abundant cattle were excep- 
tionally great. Similarly, with unlimited areas of fine agricul- 
tural land, she imported nearly all her food; and with the ma- 
terials of leather cheaper than in any other part of the world, 
she imported all her shoes. What was the explanation of 
these facts? In all cases one and the same : it was to be found 



EXPERIMENTAL FEBIFICATIOXS. 315 

in the principle of comparative cost. Ti^ustralia had consider- 
able advantages over other countries in respect to timber, butj 
ter, food, and shoes; but she bad a greater advantage still in 
respect to gold ; and so it became her interest to obtain thi 
former things by means of the latterr/ I have always regarded 
the commercial results of the Australian and Californian dis- 
coveries (for things in California followed a very similar 
course) as one of the most striking experimental verifications 
which a purely abstract doctrine has ever received. Eicardo 
was considered, and is still considered by some people, a dream- 
er of dreams, a spinner of abstract fancies; but his dreams and 
abstractions, when brought to the test of experiment, as com- 
monly happens with the dreams and abstractions of men of 
genius, have proved to be far more practical, far more closely 
in accordance with actual occurrences, than the prognostics of 
so-called "practical men," based though these may have been 
upon one knows not what collections of carefully tabulated 
statistics. Compare the facts which I have stated in connec- 
tion with the Australian trade, as illustrating his doctrine of 
"comparative cost," with the speculations of some of our lead- 
ing bankers and actuaries at the time of the occurrence of the 
gold discoveries, as to the probable effects of those events on 
the course of the money market — speculations in which one 
writer confidently predicts that the increased abundance of 
gold must lead to a fall in its price; another, that it would 
lead to a fall in the rate of interest; a third, that the exporta- 
tion of gold from Australia would cease to be profitable, and 
would therefore cease to be carried on, as soon as the price 
of gold in Sydney rose to the London level ! All these, and 
many more absurdities no less glaring, are to be found in 
pamphlets, and even in pretentious volumes, published soon 
after the epoch of the gold discoveries, by commercial men 
who piqued themselves upon their knowledge of practical bus- 
iness and their contempt for abstract speculation. 



316 DOCTRINE OF COMPARATIVE COST. 

The external trade of the gold countries presents, in a some- 
what exaggerated shape, the action of the principle of compar- 
ative cost. The superiority of productive power was here, in 
almost every instance, on the side of one of the exchanging 
parties — the Australian colonies. The reader will not, how- 
ever, suppose that, in order to the existence of a trade between 
nations, there is any necessity that this particular state of things 
should occur. ^In point of fact, it is probable that the more 
frequent case is that in which the superiority of productive 
power is divided between the trading countries, each having 
a positive as well as a comparative advantage over the other 
in respect of the commodities which form its own staples. 
Still it would be a mistake to suppose that the Australian ex- 
ample represents a purely exceptional case. So far from this, 
I am inclined to believe that in a large portion of the trade 
of the world— in most of the trade, for example, carried on be- 
tween tropical and temperate regions, as well as in the trade 
between old and new countries — the condition which we found 
so prominent in the Australian commerce — a superiority of 
productive power in respect to the staples on both sides pos- 
sessed by one of the exchanging parties — will also be found to 
obtain. One instance, which I find in the work of Mr. Bowen, 
an American economist, may here be given.^ It occurs in the 
case of the trade between the State of New York and some 
adjoining districts and the Island of Barbados. The trade 
consists chiefly of an exchange of breadstuflfs and meat on the 
side of the former country against various kinds of tropical 
produce furnished by the latter. As will be readily under- 
stood, Barbados has an immense advantage over the State 
of New York in the raising of tropical products, such as sug- 
ar, coffee, spices, etc. ; but Mr. Bowen informs us that it has 
also a decided advantage over the same regions in the produc- 

* Bowen 's "Political Economy," p. 460. 



OBSCURED BY FAULTY THEORY. 317 

tion of food — that a given exertion of industry employed for 
a given time in raising food in Barbados would be attended 
with a larger result than the same exertion employed for the 
same time in the United States, The advantage, therefore, in 
respect to both the staples of the trade is on the side of Bar- 
bados, and the phenomenon of the Australian trade is here 
repeated. The explanation, of course, lies once more in the 
law of comparative cost. Barbados and the United States 
find their account in developing those of their resources in 
which either possesses the greatest comparative superiority, or 
the least comparative inferiority, in respect of the other, em- 
ploying the products thus obtained as the means of supplying 
themselves, through trade, with others in the production of 
which the advantage of either is relatively less pronounced, or 
its disadvantage greater. I have said that this is by no means 
an exceptional case, but rather the rule, in certain great depart- 
ments of cosmopolitan trade. It is probable, for example, that 
in a large portion of the trade carried on between the United 
States and Europe the advantage of production in respect to 
the staples on both sides lies with the United States; but this 
fact is kept out of sight through the misty conception ordina- 
rily prevailing as to the nature of cost of production. Thus, 
in comparing the costs of production of different commodities 
in, say this country and the United States, people allow their 
thoughts to run off on questions of comparative wages and 
profits; and finding wages and profits higher in the United 
States than here, they are apt to jump to the conclusion that 
this is evidence of higher cost of production in the former 
country. In truth, so far as wages and profits are indications 
of cost of production at all — a point to which I shall hereafter 
recur — high wages and profits are indications of a low cost of 
production, since they are indications — being in fact the direct 
results of — high industrial productiveness; and accordingly, if 
wages and profits are higher in the United States than here, it 



318 DOCTRINE OF COMPARATIVE COST. 

is because those things in which wages and profits consist are 
more easily obtained — that is to sa}'-, are obtained at less cost 
— there than here. (The prevailing theory, which makes cost 
of production consist in wages and profits, has thus thrown a 
dense haze over the working of the principle on which the in- 
terchange of commodities between different nations is carried 
onT] Indeed, as I shall hereafter show,-the doctrine in question 
is answerable for some of the most plausible fallacies of the 
Protectionist school. For the moment, however, 1 am merely 
concerned to point out how this erroneous notion of cost tends 
to conceal the true nature of no small portion of the trade of 
the world. 



CHAPTER IT. 

INTEBNATIONAL TRADE IN ITS RELATION TO TEE RATE OF 

WAGES. 

§ 1. I HAVE endeavored in the foregoing chapter to set forth 
the theory of international trade, as it was first thought out by 
Ricardo, and subsequently expounded by Mill. In doing so, 
I remarked that the doctrine, though undoubtedly comprising 
the more fundamental conditions determining the interchange 
of nations, is, nevertheless, in certain respects defective. It 
remains for me now to point out wherein consists the short- 
comings then referred to. 

fin the first, place, I must observe that cost of production, 
though it may be, and generally is, the ultimate condition gov- 
erning international exchange, is never in any case the proxi- 
mate or immediate cause. That proximate or immediate cause 
is not cost, but price. , The ordinary merchant whose business 
leads him into foreign trade knows nothing of "cost of pro- 
duction," as consisting of labor and abstinence, and still less 
does he know of " comparative cost of production." The con- 
siderations which determine his conduct are far more simple. 
He attends, not to the cost — the expenditure of labor and ab- 
stinence — at which commodities may be produced, but to the 
prices at which they may be bought and sold, and 'tlie only 
comparison he enters into is a comparison of the prices of the 
articles he deals in as they are in his own country and in the 
foreign market with which he trades.\ When the state of 
prices in these different localities is such as to render it prof- 
itable to transport commodities from one to the other for the 



320 WAGES AND FOREIGN TRADE. 

purpose of sale, he engages in this operation and looks no far- 
ther : when the state of prices does not admit of this, he ceases 
to operate. Further, as Kicardo himself pertinently reminds 
us, v' every transaction in commerce is an independent transac- 
tioiT^" and if there be a prospect of profit on the export or im- 
port of any single commodity, that commodity will be export- 
ed or imported wholly irrespective of what may be the state 
of the markets as regards other commodities. How are these 
facts to be reconciled with the theory expounded in the last 
chapter, that international trade is governed by comparative 
cost of production ? •, Ricardo's answer would run in some 
such form as this: first, he would say,. by virtue of the fact 
that relative prices within each country correspond to, and 
vary with, the relative costs of commodities produced within 
that country ; so that a state of relative prices which would 
make it profitable to export certain commodities and import 
others would indicate a corresponding condition of the relative 
costs of production of the commodities thus exchanged. And, 
secondly, he would meet the difficulty as to the independent 
character of each commercial transaction by showing that, 
though independent, in the sense of being undertaken with- 
out reference to any transaction beyond itself, each commer- 
cial transaction nevertheless entails consequences which con- 
nect it with subsequent commercial transactions^ The case 
may be illustrated by a hypothetical example. Suppose the 
price of some commodity suitable for international commerce 
to be lower in country A than in country B — I assume the 
difference in price to be sufficient to yield a profit on the in- 
vestment during the period between purchase and sale, and I 
put aside, for simplicity of illustration, the element of cost of 
transport — nothing more than this is necessary in order that 
the commodity should be sent from the former to the latter 
country. It will accordingly be sent; and the merchant who 
undertakes the transaction will get his profit. But this is not 



PROXIMATE CONDITIONS. 321 

the end. The commodity being sold, its value must be trans- 
mitted from country B, in which the sale took place, to coun- 
try A. The question arises, in what form will it be sent ? If 
it be sent in the form of some commodity produced in country 
B, the price of this commodity, to make the transaction profit- 
able, will need to be lower in country B than in country A. 
The former commodity was lower in country A than in coun- 
try B: the latter will be lower in country B than in country 
A. The comparative prices of the two commodities will 
therefore be different in the two countries, and, prices being 
ruled by costs, the transaction will only be profitable when the 
comparative costs are different. But country B might pay 
for its import, not by the export of a commodity of its own 
produce, but by remitting gold. Let us consider this case. 
There are two suppositions possible. Country B either pro- 
ducjes gold or it does not. If, taking the former supposition, 
and assuming therefore that gold is for country B a staple of 
merchandise, the gold price of the imported commodity is high- 
er in country B than in country A — this proves that the cost of 
obtaining gold is lower relatively to the cost of the commodity 
in the former than in the latter country. There is thus a dif- 
ference in the comparative costs of gold and of the commodity 
in the two countries, and the trade would be carried on by an 
exchange of one for the other in strict conformity with Eicar- 
do's doctrine. But now take the other supposition. Gold, we 
will suppose, is not a product of country B. Under these cir- 
cumstances, and assuming further, for simplicity of illustration, 
that the two countries trade exclusively with one another, it is 
evident that the trade can not be carried on permanently upon 
the terms of an exchange of a commodity on the side of coun- 
tiy A against gold on that of country B ; for the continued 
transference of gold from the latter to the former country 
would sooner or later act upon prices in the two places, lower- 
ing them in B and raising them in A ; and then one of two 

21 



322 WAGES AND FOREIGN HBADE. 

things would happen : either the commodity which formed the 
subject of the trade would rise in price in country A till it be- 
came no longer profitable to export it, and then the trade would 
come to an end ; or before this occurred, the price of some 
commodity in country B would be brought below the level of 
its price in country A; and this commodity would become 
then for B the means of paying for its import. There would 
thus be established a difference in the comparative prices of the 
exchanged commodities in the two countries ; and, prices with- 
in the limits of each country being governed by cost of pro- 
duction, this would imply a corresponding difference in their 
comparative costs. Under all circumstances, therefore, it would 
be concluded, notwithstanding that prices are the immediate 
consideration, and notwithstanding that each commercial trans- 
action, so to speak, stands upon its own merits, the fundament- 
al -condition underlying the whole, supplying the motives and 
determining the result, is the comparative costs of producing 
commodities. 

The logic of the foregoing argument, which is in substance 
the argument employed in Eicardo's exposition of the doctrine, 
appears to me to be without flaw. But to one of the premises 
involved in it I have already taken exception, and, unless my 
reasoning is fallacious, it can no longer be admitted. It is as- 
sumed throughout that the relative prices of commodities with- 
in the limits of each country are universally — or at least so 
generally that the exceptions are not worth noticing — governed 
by the relative costs of their production. Now I have endeav- 
ored to show in an early chapter of this work* that this as- 
sumption is not well founded, i. Cost of production, as a princi- 
ple regulating value, is only operative within the limits of ef- 
fective competition ; and, though this condition is largely real- 
ized in this and most civilized countries, and still more exten- 

* Part i. , chap. iii. 



PROPOSED EMENDATIONS. 323 

sively in new communities like our Australian colonies and 
some American States, it is yet far from being universal, and, 
especially in countries in which, as in England, the social 
structure is very complex and of long standing, suffers numer- 
ous and serious checks^ The consequence is, that cost of pro- 
duction, though the principal influence in the case, is not the 
only one. -To a considerable extent in countries of old civilisa- 
tion, to a less extent in new communities, Reciprocal Demand 
takes the place of Cost of Production as the regulator of do- 
mestic prices. J In all those exchanges, for example, carried on 
between what I have called non-competing industrial groups, 
the law governing such exchanges, and therefore governing 
the relative prices of the products proceeding from such groups, 
is that furnished by the former, not that furnished by the latter 
principle. But prices, as we have seen, are the proximate con- 
ditions determining international exchange. It follows, there- 
fore, that international exchange is sometimes determined, not 
merely proximately but ultimately by other conditions than 
cost of production ; and that the theory of that branch of trade, 
as left us by Ricardo, is by no means as complete and ex- 
haustive as he and bis most distinguished successors have 
regarded it. 

§ 2. It remains, then, that we endeavor to^bring the theory 
into correspondence with the facts such as we have found them 
to be; and in order to this it will be necessary to subject it to 
some such modification as the following:! The proximate con- 
dition determining international exchange is the state of com- 
parative prices in the exchanging countries as regards the com- 
modities which form the subject of the trade. But compara- 
tive prices within the limits of each country are determined 
by two distinct principles — within the range of effective indus- 
trial competition, by Cost of Production ; outside that range, 
by Reciprocal Demand. The ultimate conditions, therefore, 



324 WAGES AND FOREIGN TRADE. 

on which international trade depends are, where the commodi- 
ties are produced in each country under a regime of competi- 
tion, a difference in the comparative costs of producing them; 
where effective competition does not obtain such a state of Re- 
ciprocal Demand among non-competing groups as shall issue 
I in a difference, in the exchanging countries, in the comparative 
prices of the products proceeding from such groups. / 

§ 8: And now, in order to exhibit the practical consequences 
invblved in the modification of the received doctrine just pro- 
posed, and to satisfy the reader that the point raised is some- 
thing more than a mere formal and barren criticism, I will ask 
his attention to a question which has been of late a good deal 
discussed— (the connection, namely, between the rate of wages 
prevailing in a country and the course and character of its ex- 
ternal traded < 

' It is a very general opinion among commercial men in this 
country that, if not the most important, at least at the present 
time the most urgent, condition required for promoting the de- 
velopment ofBritish commerce, is that the rate of wages should 
gentsrally be reduced, or, at the least, should not be permitted 
to rise above its present level. " Dear labor," says Mr. Brassey, 
expressing an opinion which has since been echoed in many a 
leading column, "is the great obstacle to the extension of Brit- 
ish trade." Nor is this opinion by any means confined to 
Grreat Britain. Ask a New England merchant why the United 
States are unable to compete with Great Britain in the manu- 
facture of cotton fabrics, and it is one hundred to one he will 
teU you it is owing to the high price of labor in the Union as 
compared with the low rates prevailing on this side of the At- 
lantic. Ask, again, a Melbourne merchant why Victoria, not- 
withstanding her fine agricultural resources, still continues to 
import a portion of her food, and the answer will be similar: 
the' higher price of labor in Victoria than iii the other Aus* 



THE COMMERCIAL VIEW. 325 

tralian colonieSj or in the districts of South America from 
which corn may be obtained, will be considered as telling usl 
all it is needful to know in order to a full comprehension of > 
the fiict. 

Such is the nearly universal opinion on this subject among: 
commercial men ; and yet it needs but little consideration tor 
show that it is in direct conflict with the received economic 
doctrine, as expounded by Eicardo, as to the causes governing, 
foreign trade. For it must be remembered that by cost of pro- 
duction, at all events in connection with the theory of foreign 
trade, both Eicardo and Mill understood what I have maintain- 
ed to be in all cases the proper signification of the phrase — ■ 
namely, cost as measured in number of days' labor and absti- 
nence; and it is by comparative cost as thus measured that, 
according to the theory, international trade is governed. But 
inasmuch as a rise or fall in the rate of wages has no effect on 
the comparative quantities of labor required for the production 
of different commodities, it is evident that if the received theo- 
ry be true, this circumstance must be incapable of altering in 
any way the course of foreign trade; and this was undoubted- 
ly Eicardo's opinion. Indeed it was a leading doctrine in his 
scheme of ideas, on which he insisted with reiterated emphasis, 
that high wages do not make high prices — a position which of 
itself involves the negative of the prevailing view. There can 
be no question, therefore, that the opinion so widely entertain- 
ed as to the effect of wages on foreign trade finds no sanction 
whatever in the theory of Eicardo. I have already, however, 
shown reasons for regarding that theory as imperfect. As I 
view the case, external trade is governed proximately by rela- 
tive prices, and relative prices are, in some instances, hot in- 
deed determined by wages, but so intimately connected with 
wages that the movements of the two phenomena are steadi- 
ly coincident. The theory of international trade, therefore, as 
1 hold it, does not exclude the possibility of its course being 



326 WAGES AND FOBEIGN TRADE. 

afifected by movements in the rate of wages : at the same time 
I believe that what may be described as the commercial view 
of this subject is almost wholly erroneous. 

Let us consider the sort of argument by which it may be 
supposed the opinion in question would be supported. It 
would, I apprehend, run in some such form as the following: 
taking, for example, the case of wheat imported into Victoria 
from South Australia or from the nearest South American 
ports, it would be argued that this was owing to the inability 
of Victoria to compete with these latter countries, owing to 
the high price of her labor. Let the price of labor in Victoria 
only fall to the same level as in the countries from which it 
imports its wheat, it would be plausibly urged, and it will at 
once become profitable to raise wheat in Victoria from soils 
from which it can not now be raised with profit. What would 
be the reply of Eicardo to this argument? He would answer 
that if wages fell in agriculture, they would also fall in gold- 
mining, in sheep-farming, and in all the other industries of the 
colony. The relative attractiveness of the several occupations, 
as investments for capital, would not be altered, and there 
would be no reason that capital should be distributed among 
them in other proportions than at present. It is true indeed 
that, with a reduced rate of wages, the cultivation of wheat 
would yield a profit where it would not yield one now, but 
that is not the question. The question is, would it yield the 
rate of profit current in the colony f Now it must not be for- 
gotten that the change which we suppose to have taken place 
— a fall in general wages while the conditions of production 
remain in other respects unaffected — would imply a rise in 
general profits, Australian farmers, therefore, would not be 
satisfied with the rate of profit which they now receive ; they 
would expect as high a return upon their capital as — allow- 
ance made for the special circumstances of different pursuits — 
could be got in other occupations ; and this they could only 



THE COMMERCIAL VIEW. 327 

obtain by confining their operations to lands of equal fertility 
■with those which they now cultivate. In a word, the change 
in the rate of wages being general, and affecting all occupa- 
tions alike,* there would be no more reason for extending the 
employment of capital in agriculture than for doing so in any 
other branch of production. The capital at the disposal of the 
colony, under a low, as under a high, rate of wages, would, 
therefore, continue to be distributed among the various indus- 
tries pretty much as it now is ; and Victoria would have pre- 
cisely the same reasons as at present for importing a portion 
of her food.f It need scarcely be added that this reply, what- 
ever its merit, would be not less valid against the same argu- 
ment whether urged in Melbourne, New York, or London. 

§ 4. It is evident that the reply which I have attributed to 

* As has been pointed out by Eicardo and others, it is not strictly true that a 
fall or rise in general wages would affect all industries alike. Industries in which 
fixed capital was largely employed would be less affected by the change than those 
in which the outlay consisted mainly of wages, and the result would be made man- 
ifest by a change in the relative values of the products of the respective industries. 
These are details, however, into which it is scarcely necessary to enter in arguing 
the general question of the effect of wages on foreign trade. So far as they took 
effect, however, the course of foreign trade would no doubt undergo more or less 
modification, but by no means necessarily in the direction which the common 
opinion supposes. A fall in wages, for example, might easily have the effect of 
checking instead of promoting the exportation of an article if it happened to be 
one in the production of which fixed capital was largely employed ; as, on the 
other hand, a rise in wages might lead to the exportation of a commodity which 
it had not previously been profitable to export. In the particular instance dis- 
cussed in the text the circumstance in question would have scarcely any practical 
operation, the industries of a new country like Australia standing pretty much on 
the same footing as regards the use of fixed capital. 

1 1 shall be told, perhaps, that for some time past Victoria has, as a matter of 
fact, year after year extended her agriculture and curtailed her importation of 
food from abroad ; and that this has been synchronous with a fall of wages in the 
colony. The fact is so, and I shall presently have occasion to point out the real 
connection between the two phenomena. 



388 WAGES AND FOREIGN TRADE. 

Eicardo is valid on the assumption wHich he constantly makes, 
that industrial competition is effective over the entire range of 
a country's industry; but it is equally plain that it ceases to 
be cogent just in the degree in which this assumption ceases 
to be true in fact. In old countries like England, as I have 
pointed out, the regime of industrial monopoly covers a con- 
siderable area, but even in new communities like the Austra- 
lian colonies competition is not quite universal. I shall now 
advert to an example of this failure of industrial competition 
furnished by the industrj^ of Australia which will set the point 
at issue in a clear light. 

As all the world knows, the colonies of Australia have been 
mainly peopled by immigrants from this country and their 
descendants. Among the population as thus constituted in- 
dustrial competition would, I should apprehend, be nearly, if 
not quite universally, effective. No one would be excluded 
by law, by social circumstances, or, after he had been a short 
time in the colony, by want of means, from taking part as a 
laborer in any industrial occupation. If this be so, wages 
throughout the principal industries of the country would fol- 
low the law which apportions remuneration to sacrifice, as as- 
sumed by Eicardo ; and a rise or fall of wages would conse- 
quently within this range have no effect upon the distribution 
of capital among the various industries, nor, therefore, upon 
its foreign trade. But into the ordinary population a small 
infusion of alien races has found entrance ; in particular, the 
Chinese have found their way into Victoria and New South 
Wales, and for some years a considerable importation of Poly- 
nesian laborers into Queensland has been in progress. These 
people do not take part in the general industrial competition 
of the country; but partly through the prejudices existing 
against them, partly through physical or intellectual inability, 
are confined to a few of the simple and cruder industries. It 
results that the rate of remuneration in their case fails to fol- 



ILLUSTRATIVE EXAMPLES. 329 

low the same rule which holds among the Anglo-Saxon popu- 
lation. A rise or fall of wages may occur among those alien 
races without affecting wages generally in the colony, and con- 
sequently may affect the relative attractiveness, as investments 
for capital, of the particular industries in which they are em- 
ployed. In this way the course of foreign trade may come 
to depend upon the price at which a particular kind of labor 
may be obtained. The most decisive example in point is that 
of the Polynesian laborers in Queensland. Sugar cultivation 
has been started in that colony, and it is asserted — so far as 
I can gather, with good reason — that the prosperity and even 
the continuance of the industry depends upon the possibility 
of obtaining cheap labor from Polynesia, The immigrant 
from this country is but ill fitted to endure the exposure to 
the extreme heat of that region which labor in the sugar fields 
demands, and consequently can not be drawn to that work 
unless by the inducement of a proportionally high reward. 
But the Polynesian can expose himself without detriment to 
a tropical climate; the processes of sugar cultivation are of a 
simple mechanical sort such as the rudest laborer may per- 
form; and, his expectation of reward not being pitched high, 
he is easily induced, for a rate of pay considerably under that 
prevailing in the colony, to hire himself for the work. On 
the other hand, the Polynesian is unfitted, from his habits, and 
to some extent from his inferior physique, for taking part, ex- 
cept in a quite subordinate way, in the ordinary mining, pas- 
toral, and agricultural occupations. It results from all this 
that the possibility of cultivating sugar in Queensland with 
the ordinary profits of the place depends almost entirely on 
the presence there of these Polynesian laborers ; and sugar be- 
ing mainly used as an article of export, it comes to pass that 
the course of foreign trade in this article turns almost entirely 
upon a question of wages. 

The case I have taken for illustration affords a somewhat 



330 WAGES AND FOREIGN TRADE. 

exaggerated example of the consequences which may arise in 
the foreign trade of a country from an interruption to the free 
play of industrial competition. But though the results may 
be less conspicuous, they are in character and principle the 
same, wherever a similar interruption, in whatever degree, is 
experienced. In Australia the obstacle to free competition 
lies in difference of race. In Great Britain the impediments 
are of a social and material kind ; but the economic effects are 
identical. In each case alike partial and limited movements 
in the wages of labor are rendered possible ; and, in the man- 
ner I have explained in a former chapter,* such partial and 
limited movements are always attended by corresponding 
changes in the relative prices of commodities. But, as we 
have seen, the relative prices of commodities are the proxi- 
mate condition on which the course of foreign trade depends. 

So far, therefore, the theory of foreign trade, modified in the 
manner I have proposed, finds room for the common notion, 
at least to the extent of admitting the existence of cases in 
which international trade may be affected by changes in the 
rate of wages — a view which the theory, as it came from the 
hands of Eicardo, absolutely excludes. The nature and ex- 
tent, however, of the results which may accrue from occur- 
rences of this kind are by no means of that simple and obvi- 
ous character which is commonly supposed. It will serve to 
clear our ideas upon this point if we consider the possible con- 
sequences involved in the following hypothetical case. 

Let us suppose a fall of wages to take place in some leading 
branch of English manufacture — say Sheffield cutlery — what 
would be the effect of this on the external trade of England? 
It has been alreadj?^ seen that, if the change supposed were ac- 
companied by a corresponding change over the whole field of 
English industry, the effect would be nil upon the distribution 

* Part ii., chap. ii. 



ILLUSTRATIVE EXAMPLES. 3S1 

of capital in the country, and therefore upon the course of our 
external trade ; but the same conclusion may easily be reached 
by another path. For example, the common notion is that a 
general fall of wages would lead to a general fall of prices, and 
this again to an immense extension of the export trade of the 
country. Now, supposing this result to happen, it is at least 
evident that there would be nothing in the case to cause a cor- 
responding extension of our import trade. Observe then what 
would ensue. Foreign nations would become heavily our debt- 
ors, and a great flow of gold would set in from all quarters to- 
ward England, which, becoming the basis of new creations of 
credit, would quickly reproduce the former state of wages and 
prices, when our export trade would at once return to its for- 
mer limits. We are thus, though by a different route, con- 
ducted to the same conclusion as before, that a movement of 
wages, where it is general, can have no effect upon foreign 
trade. Let us now consider what the result would be, sup- 
posing the fall in wages not to extend beyond the group of 
trades in effective competition with the principal industries of 
Sheffield. It is evident that h is only in so far as the fall in 
wages is followed by a fall in prices that it can affect foreign 
trade at all. I will assume, then, that the prices of Sheffield 
manufactures fall in proportion to the fall in Sheffield wages; 
and on this assumption any of three possible consequences 
might ensue. The increased demand of foreign countries for 
Sheffield wares might be in proportion to their increased cheap- 
ness, or it might be in less proportion or in greater. In the 
first case, while sending a greater quantity of cutlery abroad, 
we should only send the same value : foreign nations would be 
in our debt as regards this item in the international account to 
no greater extent than now, and — no change having occurred 
in the price of foreign commodities — we should consequently 
receive from them the same quantity of the produce of their 
industry, neither more nor less, than they now send us. The 



332 WAGES AND FOREIGN TRADE. 

net result, therefore, of what had happened would be a gain 
for all consumers of Sheffield wares, whether living in this 
country or abroad, obtained at the expense of the workmen 
of Sheffield. Sheffield employers might reap some temporary 
gains, but competition would quickly reduce their profits to 
'the usual rate : as a permanent result, they would be, no bet- 
ter off than before ; while the foreign trade of England would 
not be extended. Take now the second case, and let us sup- 
pose that the increased demand from abroad is less than in 
proportion to the fall in price of Sheffield wares. In this case, 
also, the consumers of those wares would everywhere be ben- 
efited, but the foreign trade of the country, so far as Sheffield 
contributed to it, would, at least in the first instance, be pos- 
itively curtailed. This, however,. would be merely the initial 
effect. The reader must remember that, by hypothesis, the 
export of Sheffield manufactures, though greater in point of 
quantity, has, through the fall in price, become smaller in value 
than formerly. It follows that our exports— assuming the state 
of things previously in existence to have been one of commer- 
cial equilibrium, and that other things remain the same — would 
be insufficient to discharge our foreign liabilities. An efflux of 
gold from England to foreign countries would, therefore, set in, 
and would continue so long as prices here and in foreign coun- 
tries remained at the same relative level which had rendered 
the drain necessary. This, however, could not be for long. 
The transfer of gold from England to foreign countries would; 
in the usual way, lead to a re-adjustment of relative prices, 
and, as a consequence of this, to a re-adjustment of reciprocal 
demand. What the exact character of this re-adjustment 
would be, it is impossible a. priori to say. English demand for 
foreign products might fall off, which would imply a contrac- 
tion of English foreign trade, or foreign demand for English 
products might increase, which would imply an augmentation,; 
or both consequences might in different degrees be realized, 



ILLUSTRATIVE EXAMPLES. 333 

which would be consistent with either diminution or increase. 
All that is certain is that, in the definitive result, commercial 
equilibrium would be restored — the exports of England, that 
is to say, would be brought into due relation to her foreign li- 
abilities.* The third possible case is that the foreign demand 
for Sheffield wares should increase in a proportion beyond that 
of their cheapness. In this event foreign nations would, in the 
first instance, become our debtors to a greater extent than the 
proceeds of their ordinary trade would cover. An efflux of 
gold would now set in from them to us ; and the necessity 
would again arise of a change in the reciprocal demand of En- 
gland and foreign nations. Commercial equilibrium would 
here, too, ultimately be re-established; but, as in the former 
case, the end might be reached by any of the same three 
methods, and the definitive result would be equally compati- 
ble with a contraction or an expansion of international trade. 

In the foregoing example I have argued on the assumption 
of a fall in wages occurring in some leading branch of English 
industry. If instead of a fall we supposed a rise, and this 
rise to be confined to some particular departments of trade, we 
should find ourselves conducted, by a similar course of reason- 
ing, to precisely the same conclusion. In the first instance the 
advance in price would check foreign demand for the English 
commodities which had risen, but this would lead to a re-dis.- 
tribution of the precious metals between England and the 
countries with which she traded, and this again to a change 
in relative prices, which would issue in a restoration of the 
equilibrium of trade — a result, in this case also, compatible 
alike with augmentation or decrease. 

We may, then, sum up the results of this part of our in- 
vestigation : Partial, as opposed to general, movements in the 



* I am here obliged to anticipate a portion of the theory of international values 
to be set forth in the next chapter. 



334 WAGES AND FOREIGN TRADE. 

wages of labor affect the foreign trade of a country, but it is 
impossible to say a priori in what direction, whether of expan- 
sion or of contraction. To know this it would be necessary 
to know what the definitive result would be as regards rela- 
tive prices in the country in which the change of wages had 
occurred, and those with which it trades. If this were, on the 
whole, to augment the difference in relative prices in the two 
places, an extension of international trade would be the conse- 
quence; but in the contrary event, which is equally possible 
and probable, the opposite effect — a contraction of trade — is 
that which would be realized. 

§ 5. Let me now state the point to which the general argu- 
ment has been carried. I have endeavored to show that a rise 
or fall of wages in a country, so far forth as it is general, has 
no tendency to affect the course of foreign trade: a fall in the 
general rate does not tend to an extension of foreign trade, any 
more than a rise in that rate necessitates a contraction. On 
the other hand, I have pointed out that, where, owing to the 
existence of impediments to the action of free industrial com- 
petition, partial movements in the rate of wages occur, inas- 
much as these issue in a change of relative prices, the course 
of foreign trade is in this case affected, though it is impossible, 
previous to experience, to say in what direction the change 
may take place. So far the argument has been carried. I 
desire now to consider a problem which, except upon its nega- 
tive side, has not yet, so far as I know, received the attention 
of economists — I mean the nature of the connection that exists 
between general wages and foreign trade. We have seen that 
that connection is not one of cause and effect; but we have yet 
to discover what its nature is. General wages do not determine 
foreign trade, but it by no means follows that the two phenom- 
ena are not intimately connected ; and this we shall find to be, 
in point of fact, the case. 



FLUCTUATION IN PRICE OF LABOR. 335 

I recur once again to that rich repertory of economical expe- 
rience, the recent history of our Australian colonies. As we 
have already seen, the discovery of gold in those colonies in 
1851 was the signal for a sudden and extraordinary develop- 
ment of foreign trade, which was accompanied by an equal- 
ly sudden and extraordinary advance in the wages of labor. 
This remarkable movement reached its culmination about the 
year 1852 or 1853, when the rate of wages in the rough work 
of gold mining was, for some time, maintained at the. very 
high point of 205. a day. We have unfortunately no exact 
commercial statistics previous to 1856 ; but in that year the 
total external trade of the principal gold colony, Victoria, 
amounted to over £80,000,000 sterling. From 1856 to the 
present time the history of the colony has been one of extraor- 
dinary prosperity; but coincidently with this prosperity we 
notice two remarkable facts — a pretty steady decline through- 
out the whole of the period at once in the wages of labor and 
in the dimensions of external trade. As I have just said, that 
trade in 1856 had attained the large aggregate of £30,000,000 
sterling. In 1870, after fourteen years of such prosperity as 
I have referred to, it stood at less than £25,000,000. The fall 
in wages has not been less striking. It had risen to 205. a 
day : it has now fallen for the same mining labor to about 
half that rate. Wages and foreign trade have thus declined 
pari passu; every step in the descent of wages having been 
accompanied by the dropping off of some former import, and, 
as a consequence of this, a corresponding extension of domestic 
industry in the colony. The facts, it will be observed, nega- 
tive most decisively the prevalent commercial opinion on the 
subject under consideration. Dear labor in 1852 did not pre- 
vent the sudden and extraordinary expansion of Victorian 
trade, any more than comparatively cheap labor in 1870 has 
been able to prevent its contraction. On the other hand, it 
must be allowed that the power of Victoria to compete with 



336 WAGES AND FOREIGN TRADE. 

foreign nations, evidenced as this has been by an extension of 
her domestic industry which has been coincident with a fall in 
the price of labor, seems to furnish corroboration of the popu- 
lar notion at the root of the commercial doctrine. It is indeed 
very evident that all three facts — the decline of foreign trade, 
the fall in the rate of wages, and the extension of domestic 
production — are intimately connected; but the question is, 
what is the nature of the tie that binds them? The true an- 
swer is to be found in the fact that the several occurrences are 
co-ordinate effects of a common cause ; that cause being the 
gradual /exhaustion of the richer and more accessible gold de- 
posits. lAs industry became less productive in raising gold, 
the amount to be divided between laborer and capitalist be- 
came less, and money wages therefm^e fell. As gold, with the 
increased difficulty of production, became more costly, it be- 
came, just in the same degree, a less profitable means of ob- 
taining the various commodities which Victoria required : she 
ceased, therefore^ to employ this means to the same extent as 
formerly, and began instead to produce commodities directly 
from her own resources: in other words, her foreign trade un- 
derwent contraction, and her domestic industry was extended. 
And as these results have been the consequence of a decline in 
the productiveness of the gold mines, so, it might be confident- 
ly predicted, a new discovery of auriferous deposits equal in 
abundance and richness to those of the earlier period would 
have the effect of reversing the present course of development, 
and by a single stroke send up money wages, give a fresh im- 
pulse to external trade, and arrest the extension of miscellane-. 
ous industries in the colony. Such is the nature of the con- 
nection between the rate of wages in a country and the course 
of its external trade and domestic industry. They are co-or- 
dinate effects of a common cause, and are consequently symp- 
toms and indications of each other. 
In the illustration j list given the condition on which the sev- 



ILLUSTRATIVE EXAMPLES. 337 

era! results depended was tlie changing cost of gold ; and — the 
change being great in point of degree, and gold being also the 
material of money — the results have been more palpable and 
striking than they would have been had the cheapened com- 
modity been one of ordinary consumption. But the effect, 
though less palpable, would not really be different in this lat- 
ter case — provided only the article affected were of a kind in 
tolerably extensive demand and suited for exportation to for- 
eign countries. I am unfortunately unacquainted with any 
actual occurrence sufficiently simple and decisive to enable me 
to exhibit, in a perfectly unequivocal light, the operation of 
the principle in this more general form, and I must, therefore, 
have recourse for this purpose to hypothesis. I will then sup- 
pose that, as the result of some mechanical invention not known 
to other nations, a great improvement has been effected in the 
manufacture of woolen goods in England — an improvement 
which would reduce the cost of manufacturing this class of 
goods in as great a proportion as the cost of gold in Australia 
was reduced by the discovery of gold — what would be the ef- 
fect of such an occurrence on the external trade of England 
and on the remuneration of labor in the country? In the first 
instance, it is evident, there would be an extensive diversion 
of English capital into the branch of manufacture thus benefi- 
cially affected ; and the increased production of woolen goods 
would lead to a fall in their price, which would only stop when 
brought into the usual relation with their now diminished cost 
of production. With the fall in price a large increase would 
take place in the foreign demand for English woolens. As, 
however, there would be nothing in the case to cause a corre- 
sponding increase in the demand of England for the commodi- 
ties of foreign countries, a transfer of gold from the latter to 
the former in payment of the enlarged exportations would be 
necessary, and this would continue until, through a rise of 
prices in England and a fall of prices abroad, the equilibrium 

22 



338 WAGES AND FOREIGN TRADE. 

of trade was re-established. At this point many articles 
which had formerly been produced in England, and perhaps 
produced for exportation, would now be selling at lower prices 
in foreign countries. Such articles would cease to be produced 
in England, or at all events to be produced on the same scale 
as formerly, and would in greater or less quantity begin to be 
imported from abroad. Ultimately we should arrive at this 
definitive result: a larger proportion than formerly of the ag- 
gregate capital of England would be devoted to the production 
of woolen goods, a smaller proportion to her other miscellane- 
ous industries; while the things formerly produced by the dis- 
placed industries would now be obtained from abroad through 
an exchange for woolen goods. In other words, England 
would avail herself of her great comparative superiority in the 
production of woolens for the purpose of obtaining more 
cheaply than before all commodities in the production of 
which her superioritj'- was relatively less. The result, so far 
as foreign trade was concerned, would thus be exactly anal- 
ogous to what happened on the discovery of gold in Austra- 
lia. But I shall be asked how as regards the wages of labor? 
The gold discoveries, as we saw, had the effect of raising the 
rate of money wages in Australia in proportion to the fall 
in the cost of money. Would a similar consequence follow 
on the hypothesis we are now considering? Beyond ques- 
tion, yes; that is to say, as wages in Australia rose, measured 
in the commodity of which the cost had been cheapened, so 
wages in England would, in the supposed case, rise, and in a 
corresponding proportion, measured in the commodity similar- 
ly affected. In the one case that commodity was gold, in the 
other woolen goods. English laborers, so far as they were 
consumers of woolen goods, would, in the supposed case, ob- 
tain that commodity more cheaply; so far as they were con- 
sumers of foreign goods, procured through an exchange for 
woolens, would also obtain those commodities more cheaply ; 



CO-OBDIXATE PHENOMENA. 339 

SO far, again, as they were consumers of commodities produced 
in England other than woolen goods, would gain nothing by 
what had occurred. It may be added that those other com- 
modities of English production, inasmuch as they were not af- 
fected by the same cause which had cheapened English wool- 
ens, would be represented in exchange by a larger quantity of 
the cheapened article than before, just as the products of Aus- 
tralia were represented by higher gold prices in proportion as 
the cost of gold fell. To state the result in a single phrase, 
the wages of English laborers, measured in woolen goods, would 
rise in proportion as the cost of those goods had fallen ; in ex- 
act analogy with what happened in Australia. Here, then, we 
find, in the case of a commodity of general consumption, as we 
had before found in the case of gold, the course of foreign 
trade and the rate of wages intimately bound together through 
the link of a common cause in the state of productive indus- 
try. It is rare indeed that changes in the cost of production 
take place on so great a scale as that realized or assumed in 
our illustrations; but where such changes do occur, be the 
scale large or small, the results which follow, though different 
in point of magnitude, are in character such as I have described. 
Every new invention, every happy discovery, that cheapens 
the cost of producing particular commodities, and so alters 
their comparative cost, sets in action forces which operate in 
the directions I have indicated, however slight and even im- 
perceptible may be the actual results which flow from each. 

The real nature of the connection between the rate of wages 
prevailing in a country and the character and course of its ex- 
ternal trade ought now, I think, to be tolerably clear. They 
are co-ordinate effects of a common cause, that cause being the 
degree and direction in which a nation's industry happens 
to be productive. Whatever be the articles with respect to 
which the industry of a nation is specially productive, these 
are the articles which will form the staple of its external trade, 



340 WAGES AND FOREIGN TRADE. 

and, measured in these, the wages of labor will be high. If 
wages are high, measured in money, this will indicate either 
rich mines of gold or silver, or a high productiveness of indus- 
try in some commodities in large demand abroad with which 
gold or silver may be purchased on favorable terms. If they 
be high, measured in food, clothing, and other necessaries and 
comforts, we may infer similarly a high productiveness of in- 
dustry, direct or indirect, with regard to those commodities. 
Thus the commodities, whatever they are, measured in which 
wages are high, will either form the staples of her foreign U'ade, 
or will be such as may be obtained at small cost through those 
staples The notion, therefore, which prevails both here and 
in the United States that the high rate of general wages ob- 
taining in each country is a hinderance to the extension of its 
foreign trade must be pronounced to be absolutely without 
foundation. Supposing a fall in wages to occur in either coun- 
try, the other conditions of production remaining as at present, 
and supposing the fall to be general, this circumstance would 
not, as I have shown, affect the relative attractiveness of the 
different branches of industry as investments for capital. Cap- 
ital would, therefore, be distributed among them as at present, 
and nothing would occur to alter the course of its foreign 
trade. The sole result would be a general rise of profits: 
capitalists would gain what laborers had lost. A fall of gen- 
eral wages, on any other assumption, would inevitably imply 
diminished productiveness in some of the great departments 
of productive industry ; and such diminished productiveness 
involving, as it would, changes in the comparative cost of com- 
modities, would no doubt entail changes in external commerce. 
But the point to be borne in mind is that the latter result, 
thouo-h coincident with, would not be the effect of the fall in 
general wages, but that both would be co-ordinate effects of 
the decline in the productiveness of industry ; and further, that 
the changes in external commerce, occurring under the cir- 



CO-OBBINATE PHENOMENA. 341 

cumstances supposed, would not necessarily be in the direction 
of extended trade. Quite as probably in either case, in the 
case of the United States much more probably, the movement 
would involve a contraction of dealings with foreign countries. 
Thus, supposing a general fall of wages in the United States, 
measured, let iis say, in gold and provisions, or, what comes to 
the same thing, supposing money wages to fall, the prices of 
provisions remaining as at present, let us consider what this 
would imply. Would it not imply that industry in the United 
States was less productive than it now is in procuring the com- 
modities in question ; and, therefore, more nearly on a par than 
at present, in the case of such products, with industry in other 
countries? Would it not, in a word, imply that the compara- 
tive cost of producing commodities there and elsewhere had 
been brought into closer approximation, and that consequent- 
ly the possible field for international exchange had been nar- 
rowed? The rate of wages and the course of foreign trade 
are thus intimately connected; but that connection (except 
within the limited range within which reciprocal demand gov- 
erns domestic values) is not one of cause and effect, but of co- 
ordinate phenomena depending upon identical conditions. 



CHAPTER III. 

INTEBNATIONAL VALUES. 

§ 1. We have now ascertained the circumstances under 
which international trade arises, and the nature of the advan- 
tages that flow from it. These advantages, as we have seen, 
are such as result from a more effective distribution of the pro- 
ductive forces of the world. Supposing a universal freedom 
of trade, it would not indeed follow that every product of in- 
dustry would be raised precisely in that part of the world in 
which it could be raised with greatest advantage; for this 
would require that population and capital should be distributed 
with no other view than to economical gain. The course of 
population and capital, however, it is needless to say, is influ- 
enced by many other considerations as well ; and what inter- 
national trade, so far as it is allowed free scope, accomplishes 
for mankind is, that the industry of the world is carried on, 
not indeed with the utmost possible advantage, but with the 
utmost advantage practicable, regard being had to the manner 
in which the world is peopled and to the condition of its in- 
habitants. 

Such is the nature of the gain ; but here another question 
arises: On what principle is the increase of wealth which re- 
sults shared among the nations which co-operate in producing 
it ? To put the same point in a different form — What causes 
determine the proportions in which trading nations exchange 
their products? These proportions may conceivably be such 
as to give all the advantage to one only of the exchanging 
parties, or such as to share it among a few to the exclusion of 



STATEMENT OF THE PROBLEM. 343 

tbe rest, or such, again, as to distribute it in any ratio what- 
ever amoiiGf them all. Accordinsr as one result or the other is 

O O 

attained, will be the quantum of advantage which each nation 
derives from its commercial dealinsfs with others. We are 
thus conducted by the course of our investigation from the 
doctrine of international trade to the special problem of inter- 
national values. 

§ 2. It may be well, perhaps, to remind the reader that the 
subject of our present inquiry is normal, not market, values — 
the proportions in which nations exchange their products as a 
rule, or when trade is in a state of equilibrium, not those in 
which the exchange may take place on a particular occasion, 
or under the influence of exceptional conditions. Now we 
have already seen that normal values depend on one or other 
of two principles: where industrial competition prevails, on 
cost of production ; and in the absence of effective industrial 
competition, on reciprocal demand. Inasmuch, however, as the 
condition of effective industrial competition (in the sense de- 
fined) is not satisfied in the intercourse of independent nations, 
it is at once evident that the ruling principle of international 
values is not cost of production, and can only be that other in- 
fluence which prevails in the absence of effective competition. 
So much is recognized in the received text-books of Political 
Economy. But here I must call attention to an inconsistency 
in which those text-books are involved, to which, indeed, in- 
cidental reference has been already made. It will be remem- 
bered that in a former portion of this work I criticised at some 
length the received doctrine of Cost of Production, which, as 
expounded by Mr. Mill and others, is represented as consisting 
in, and varying with, the wages and profits of producers. I 
stated then that this conception of cost was not reconcilable 
with the doctrine of international values upheld by the same 
authorities, which refers these phenomena, not to cost of pro- 



344 INTERNATIONAL VALUES. 

duction, but to the reciprocal demand of exchanging nations. 
I now propose to justify that criticism by showing that, re- 
garding cost of production in the sense assigned to it, inter- 
national values do, in point of fact, in all cases correspond with 
this principle ; in other words, that, while they are said not to 
be governed by cost, they nevertheless invariably conform to 
it. A simple illustration will enable me to make good this 
position. 

Let us suppose two commodities, one the product of English 
industry, the other produced in the United States, and selling 
for the same sum of money, say £1000 each. These commod- 
ities will (cost of carriage being omitted on both sides) ex- 
change for each other, and will, therefore, represent equal 
values in international trade. This being so, how stands the 
case as to their respective costs of production? Assuming 
these to consist in wages and profits, the answer must be that 
their costs of production are equal also: for, as I have else- 
where shown, the wages and profits of producers are, where in- 
dustry is continuous, In effect the outcome of the values they 
produce. The former, therefore, must be constantly propor- 
tional to the latter; and accordingly, where the values of com- 
modities are equal, as these values resolve themselves into 
wages and profits, the wages and profits of their producers — 
that is to say, according to the view we are now considering, 
their costs of production — must be equal. Now it is obvious 
that this argument admits of being applied to every instance 
whatever of international exchange;* and we are thus con- 
fronted with this singular result, that, while cost of production, 
according to our text-books, has no place in determining inter- 
national values, international values, nevertheless, according to 
principles supplied by the same authorities, invariably corre- 

* It will be seen that the case would not be altered if, instead of money, Ave take 
any other article, the subject of international exchange, for example food, as the 
measure of cost and A'alue. 



INCONSISTENT POSITIONS. 345 

spond to it. I must leave those who accept both doctrines of 
the received Political Economy to reconcile the two positions 
as they best can. 

On the other hand, if we take as our conception of cost that 
view of it for which I have contended, according to which it 
consists in labor and abstinence, the truth of the accepted doc- 
trine on its necfative side follows as a matter of course. To 
establish this we need not go beyond the illustration just given. 
Two commodities respectively of English and American pi-o- 
duction, each worth £1000, exchange for each other, and there- 
fore represent equal values in international trade. Further, as 
I have just pointed out, their values being equal, they consti- 
tute equal aggregates of wages and profits for the producers on 
each side. The American scale of remuneration, however, is 
much more liberal than the English, and the proceeds of those 
equal values will therefore be distributed in higher wages and 
larger profits on one side than on the other. It follows that 
they will not be distributed in proportion to the labor and ab- 
stinence remunerated : in other words, the costs, to which they 
correspond, will not be equal. The sacrifice will be less on 
the American tlian on the Ensflish side, Engjlish and Ameri- 
can commodities, therefore, do not exchange for each other in 
proportion to their costs of production, as consisting in the 
real sacrifices undergone by the producers. The negative side 
of the received doctrine respecting international values is thus 
found to be true, but only on the condition of understanding 
cost of production in the sense for which I have contended. 

§ 3. The argument just stated brings into view a principle 
already more than once referred to in these pages, which, as 
it will be found to have important bearings on some problems 
of international value, may conveniently be set forth with some 
distinctness here. The principle to which I refer is, that the 
relative rates of wages and profits in the different branches of 



346 INTERNATIONAL VALVES. 

industry afford an indication, ia an inverse sense, of the relation 
in which the exchange values of the commodities, proceeding 
from such branches of industry, stand to their costs of produc- 
tion. It will of course be understood that I use the term *' cost 
of production" here in the sense which I hold to be the right 
one. Thus, to revert to a former illustration, supposing that 
in the manufacture of scientific instruments wages and profits 
ranged considerably higher than in ordinary handicraft trades, 
let us say, carpentry, the fact would show that, in the exchange 
of the products of the former for those of the latter industry, 
the sacrifices involved in the production of mathematical in- 
struments bore a smaller proportion to the values of those in- 
struments than the sacrifices involved in producing common 
tables and chairs, for example, bore to their values. The cost 
would be low relatively to the value in the trades in which 
wages and profits were high, high in the trades in which they 
were low, while the relation would be one of equality where 
the rates of wages and profits w&re equal on each side. We 
are thus furnished with an easy means of determining the re- 
lation in which the exchange values of any two compared com- 
modities stand to their costs of production. If the rates of 
wages and profits obtained by the respective producers of the 
two commodities be equal — that is to say, in proportion to the 
sacrifices undergone — it is matter of demonstration that the 
commodities in question exchange in proportion to their costs. 
If they are unequal, the contrary conclusion not less certainly 
follows ; and further, the difference in the relative rates of re- 
muneration will indicate the degree in which the exchange 
values of the commodities deviate from the proportion existing 
between their costs of production. But this simple criterion 
may be made simpler still. For practical purposes, we shall 
not lose appreciably in point of accuracy if, instead of making 
it consist in wages and profits, we confine our attention to 
wages alone. Profits form but a small element in the value 



PRACTICAL CRITERION. 347 

of most commodities, and the divergence of the rates of profit 
in different occupations and in different countries is (owing to 
the greater mobility of capital than labor) much less consider- 
able than that of the rates of wages. We may, therefore, with- 
out danger of serious error, substitute "wages" for "wages 
and profits," and we are at once provided with an easy means 
of determining the relation of exchange value to cost of pro- 
duction in all cases whatever. 

To give now some examples of the application of our cri- 
terion to the transactions of international trade, I find that, ac- 
cording to investigations made by Mr. Wells,* the United 
States Commissioner, which on the whole have been confirmed 
by the Reports lately received from our agents in foreign 
countries, the relative rates of wages for similar kinds of labor 
in the leading manufacturing industries in the United States, 
England, Belgium, France, and Grermany range nearly as fol- 
lows: As compared with England, wages in the United States 
are from 25 to 50 per cent, higher ; as compared with Belgi- 
um, from 48 to 70 per cent, higher; while, as compared with 
France and Germany, the difference rises to nearly 100 per 
cent.f I need hardly say that if the comparison were extend- 
ed so as to include Oriental states, for example, India and 



* See his Eeport for 1868, pp. 67-69. 

t It is true that the returns quoted represent the rates of wages per day; and a 
day's labor, even in the same occupations, does not always represent equal exer- 
tion undergone, since men work harder and longer in some countries than in oth- 
ers. This consideration, however, if taken account of, as no doubt it should be, 
would only have the effect of strengthening the grounds of the argument in the 
text — at all events so long as the comparison is confined to the United States and 
Europe ; for from the parliamentary reports recently published upon this subject 
it appears to be almost a rule that, comparing different countries, the laboring day 
is long nearly in proportion as the rate of wages is low. Thus it is generally 
shorter in the United States than in England, in England than in Belgium and 
France, and in Belgium and France than in Germany ; tlie rates of wages in these 
several countries, as we have seen, declining in a corresponding order. 



348 INTERNATIONAL VALUES. 

China, the differences in the scales of remuneration would be- 
come still more striking, the remuneration of a day's labor in 
the United States being probably equivalent to that of four or 
five in the latter countries. Now what, according to our cri- 
terion, do these differences indicate as regards the terms of in- 
ternational exchange? They indicate this — in the first place, 
that the several nations named do not exchange their products 
with the United States in proportion to their costs of produc- 
tion ; and, secondly, that the proportion in which the exchange 
takes place deviates from the principle of cost in the degree 
marked by the differences between the rates of wages in each 
country and in the United States; in other words, our crite- 
rion shows us this — that, in the commercial dealings of those 
several nations, the product of a day's labor in the United 
States enables the workman to command the product, in round 
numbers, of a day and a third's labor in Great Britain, the 
product of a day and a half's labor in Belgium, the product 
of from one and three-quarters to nearly two days' labor in 
France and Germany ; while it probably would command the 
product of four or five days' labor in China and India. Such, 
or nearly such, are the proportions, measured by the standard 
of cost, in which the leading commercial nations of the world, 
at the present time, exchange their productions ; and so very 
far is it from being true that international values, in the actual 
dealings of commerce, correspond with that standard.* 

§ 4. So far as to the negative side of our argument. The 

* The position here contended for is very clearly, though incidentally, estahlish- 
ed in Mr. Senior's essay on the " Cost of obtaining Money," and by the applica- 
tion of the same criterion. Mr. Senior, nevertheless, held the current doctrine as 
to cost of production ; for though defining it in his treatise as consisting of " labor 
and abstinence," heat once abandons this definition, and substitutes for it "wages 
and profits," as equivalent and more convenient expressions! In the essay just 
referred to he speaks of the question as one of nomenclature. 



INDUSTRIAL MONOPOLIES. 349 

products of trading nations do not exchange for each other in 
proportion to their costs of production. There is no reason 
that the}'- should do so, inasn:mch as industrial competition is 
not effective in the intercourse of nations; and the evidence 
just adduced proves that they do not do so in point of fact. 
The prhiciple, therefore, which determines international values 
must be that one which operates in the absence of effective in- 
dustrial competition, namely, Reciprocal Demand ; and this, as 
I have already said, is the received doctrine of Political Econ- 
omy. But though Cost of Production is not in this case the 
determining cause, it does, nevertheless, exercise an important 
influence in international trade by controlling the aberrations 
of value which are possible under a regime where monoply is 
the presiding principle. This, indeed, is implied in the ordi- 
nary expositions of the doctrine ; but I do not think the fact 
has hitherto been brought out with as much distinctness and 
prominence as it deserves. 

To aid toward this result, it may be observed that industrial 
monopoly may exist under various conditions involving a cor- 
responding variety in the results which flow from it. It may 
exist, in the first place, in an absolute form, as where an indi- 
vidual or a nation possesses the exclusive power of producing 
certain commodities; or, secondly, it may be qualified, spring- 
ing from the possession of certain special facilities of produc- 
tion not shared by others, as in the case of those peculiarities 
of soil and climate which give an advantage to some districts 
and countries over others in the production of certain articles, 
which it is still possible for the latter to produce, thougli under 
less favorable conditions; while again, in commercial dealings, 
monopoly may be either one-sided or reciprocal — confined to 
one of the trading parties, or extending to both with regard to 
their respective staples. Examples of monopoly in all these 
forms will be found in international trade, and the power of 
reciprocal demand over value will be greater or less, accord- 



350 INTERNATIONAL VALUES. 

ing to the form which the monopoly in any given case may 
assume. 

For example, where the monopoly is at once strict and re- 
ciprocal — a case not frequent in international trade, but which 
sometimes does occur, as in the traffic which takes place be- 
tween the tropical and the frozen zones, in the exchange, sup- 
pose, of spices for ice — in this case the influence of reciprocal 
demand on value is unqualified and absolute, since under such 
circumstances there is nothing but the desires on each side, 
supported by such means as are available to give them effect, 
to determine the bargain. 

A more frequent and important case is that in which the 
monopoly is strict, but one-sided, or, if existing on both sides, 
only strict on one side, while it is qualified on the other. This 
species of monopoly is largely exemplified in the trade between 
tropical and temperate countries, and again in that between the 
gold-producing districts of the earth and the countries which 
trade with them. Reciprocal demand here operates, but sub- 
ject to a limit on the side of the country which has the power 
of producing both the commodities, or classes of commodities, 
forming the subject of exchange. To give an example : in the 
trade between England and Australia (for simplicity of illus- 
tration, I suppose all other gold countries to be excluded from 
the commerce) there is no limit to the possible rise which 
might take place in the value of gold — to the possible quan- 
tity, that is, of her products which England might give in ex- 
change for gold — save in the desire of England for gold and 
her ability to pay for it ; but, on the other hand, the fall in the 
value of gold — the price in gold which Australia will consent 
to pay us for our goods — has a very definite limit short of 
Australian needs for what we produce — the limit, namely, set 
by the cost at which Australia can produce those articles for 
herself So soon as prices in gold have reached the point at 
which Australia can satisfy her requirements more easily by 



INDUSTRIAL MONOPOLIES. 351 

the direct production of the commodity than by producing 
gold to be exchanged for it, the fall of gold, in relation to that 
commodity, has reached its limit, and no increasing require- 
ments on the Australian side will have any further effect on its 
international value. 

But again, there is a third case, the most frequent and im- 
portant of all in international trade — that, namely, in which 
monopoly exists on both sides, but is qualified on both. This 
occurs when each of the trading nations is in the possession, 
not of an exclusive power of production, but of a comparative 
superiority (in the sense in which this phrase has been explain- 
ed) with reference to the articles which constitute its staples 
in the trade. Here reciprocal demand still determines inter 
national values, but the range of its influence finds a limit on 
both sides. This, I say, is the most frequent and important 
case of all in international commerce. It is largely exemplified 
in the trade between the various countries of Europe, and still 
more strikingly in that between Europe and North America. 
In the exchange, for example, of wheat for cotton yarn, or of 
timber for iron, each of the exchanging countries has a compar- 
ative advantage in its own staple; and any terms of interna- 
tional exchange which are within the limits of that advantage 
will imply a gain, though not necessarily an equal gain, for 
both countries. Within these limits, therefore, reciprocal de- 
mand will operate to determine what the precise terms of the 
exchange shall be; but beyond those limits on either side in- 
ternational values can not permanently remain, since the mo- 
ment the limits thus set are transcended the resources of the 
country so placed at disadvantage can be brought into requisi- 
tion, and the motive for the trade ceases. 

These limitations on the action of reciprocal demand in in- 
ternational exchange are such as would exist if each countr}^ 
only traded with one other. But when we take into account 
the actual state of things, and consider that the external trade 



353 INTEBNATIONAL VALUES. 

of eacli country comprises dealings with many others, we find 
that the limits to the deviations of value under the action of 
demand are considerably narrower than we might at first have 
supposed. For example, reverting to the illustration already 
given of the trade between certain parts of the United States 
and Barbados, it is probable that the difference in the compar- 
ative costs of sugar and flour in those two countries is very con- 
siderable ; and that consequently a very considerable latitude 
would exist for possible variations in the terms on which the 
staples are exchanged under the influence of American demand 
for sugar and Barbadian demand for flour. But before the ex- 
treme limit could be reached on either side, the resources of 
other countries would come into requisition. Any considera- 
ble advance of sugar in relation to flour, or of flour in relation 
to sugar, or, let us say (since money is the medium through 
which the transactions would be effected), any considerable ad- 
vance of United States prices in relation to prices in Barba- 
dos, or the reverse, would bring other countries into the field, 
and make their resources available for controlling the advan- 
cing price, on whichever side it might happen to be. The ce- 
real capacities of Canada and South America would control the 
aberrations on the side favorable to the United States; while 
those on the side favorable to Barbados would be kept in check 
by the competition of the sugar producers of Jamaica and Cuba. 
It thus appears that it is not the difference in the comparative 
costs of production in each pair of trading countries that fixes 
the limits to the possible variations of international values un- 
der the influence of reciprocal demand, but, among all coun- 
tries mutually accessible for commercial intercourse, the differ- 
ence of comparative costs, as it exists in the particular coun- 
tries in which that difference is least. The limits of variation 
are thus set by the minimum, not by the maximum, difference 
in comparative cost among the various exchanging and com- 
peting countries. 



CONTROLLED BY COST. 553 

Sucb is the nature of the influence exercised respectively by 
reciprocal demand and by cost of production in international 
exchange. The former determines; the latter only controls. 
The distinction between these two functions will be made 
clear by comparing the action of cost, as just described, with 
its action in domestic trade. In domestic trade cost of pro- 
duction, within the limits of effective competition, not merely 
controls, but determines normal value — not merely sets limits 
to the variations, but establishes a point toward which they 
converge. It has accordingly been aptly represented by Adam 
Smith as a central point about which market values move, and 
toward which they gravitate. In the instance of international 
trade, the correct figure by which to describe its action would 
be, not a point about which values move, but a circle within 
which they move. Accordingly, it must be carefully remark- 
ed that, even in those cases in which its influence is operative, 
there is no correspondence — at all events no necessary corre- 
spondence — between values and costs. The examples I have 
already given of the relative rates of remuneration prevailing 
in different countries sufficiently establish this point. 

§ 5. As regards the mode of operation by which interna- 
tional values are determined under the action of international 
demand, I do not propose to attempt any detailed illustration 
here. The subject will be found very fully treated in text- 
books in every one's hands. There is one point, however, on 
which it seems to me the correct doctrine has not been quite 
clearly laid down, and on this it may be well here to attempt 
a few remarks. 

The transactions of international trade are of course carried 
on through the medium of money — that is to say, of gold and 
silver; and Eicardo has shown that the effect of the play of 
international demand is to produce such a distribution of the 
precious metals, and such a relative scale of prices in commer- 

23 



354 INTERNATIONAL TALUES. 

cial countries, as on the whole to cause the trade of each coun- 
try with all others to be carried on upon the same terms as it 
would be if conducted by barter. When this state of things is 
realized, the precious metals (so far as they are employed as a 
medium of exchange, and not as a staple of commerce) cease 
to pass from country to country ; and international trade is in 
a condition of equilibrium.* The point I desire now to call 
attention to is the condition of international demand which is- 
sues in this result. 

The solution commonly given of this problem is that com- 
mercial equilibrium is attained when the value of the imports 
into a country, measured in gold or silver, the universal mon- 
ey of commerce, is equal to the value of the exports from that 
country. In the language of Mr. Mill, "the produce of a coun- 
try exchanges for the produce of other countries at such values 
as are required in order that the whole of her exports may 
exactly pay for the whole of her imports."f Now, as a mat- 
ter of fact, it very rarely happens that the whole exports of 
a country, even if we take an average of many years, exactly 
pay for the whole of its imports; nor can it be truly said that 
there is any tendency in the dealings of nations toward this 
result. The evidence of this is to be found in any statistical 

* The equilibrium of commerce may, accordingly, be defined for all countries, 
not being themselves producers of the precious metals, as that state of trade which 
results in maintaining the real exchanges, one year with another, at par. Where 
it happens, however, that a country produces gold or silver for export, a premium 
on the exchange is, in this case, the normal state of things. During the last twen- 
ty years the commercial equilibrium has been extensively disturbed in most coun- 
tries — the necessaiy consequence of the large additions now being made to oui* 
stock of money. 

t In a later passage at the end of the chapter on the "Distribution of the Pre- 
cious Metals," Mr. Mill recognizes that there are other causes than commercial 
which affect the relation of impoits and exports, and the equilibrium of commerce. 
But the recognition, only introduced at the end of the discussion, and in quite a 
summary way, seems scarcely adequate to the requirements of the case. 



COMMERCIAL EQUILIBRIUM. 355 

table showing the exports and imports of different countries. 
An examination of such a table will show that there are coun- 
tries which constantly, and as a normal state of things, import 
largely in excess of their exportations, while there are others 
of which the exports as regularly exceed the imports. In 
other cases, again, the imports will be found for a time to have 
exceeded the exports, after which the relation is inverted, and 
the exports begin to outstrip the imports. With such facts 
before us we can not easily admit that an equalization of im- 
ports and exports is the necessary condition of a staple trade ; 
and this being so, we have to consider what that condition is. 

To elucidate this, a better example can not be found than 
the external trade of the United Kingdom. I take it as set 
forth in the Statistical Abstract for the years between 1856 
and 1870 inclusive. During the whole of this time the im- 
ports remained constantly and largely in excess of the exports. 
At the commencement of the period the exports stood at, in 
round numbers, £115,000,000, the imports at £172,000,000; 
the imports thus exceeding the exports by the amount of 
£57,000,000 sterling. At the end, that is to say in the year 
1870, the exports were £199,000,000, while the imports reach- 
ed £303,000,000, showing a difference in favor of imports of 
£104,000,000 ; and the returns of the intervening years ex- 
hibit a constant predominance on the same side, and nearly in 
the same proportion. The question arises. How has this large 
excess of imports been paid for? The answer is, to a small 
extent it has been paid for in services, principally in the serv- 
ices of our mercantile marine, performing as it does a Ijirge 
proportion of the carrying trade of the world, but, in the main, 
it has not been paid for at all. It came to us from foreign na- 
tions, as all our imports have come, in the ordinary course of 
trade, but the proceeds on sale have never been returned in 
any form to those from whom the goods came : they were 
applied instead to the discharge of debts owing to us — debts, 



356 INTEBNATIONAL VALTJES. 

however, incurred on account of transactions wholly apart 
from our export trade. In point of fact, what has happened 
has been this: Great Britain has for a long time occupied the 
position of a lender of capital to other nations; she has invest- 
ed her capital freely in her own colonies ; she has lent money 
to many countries for industrial undertakings, and has been a 
large purchaser of foreign stocks. On all these accounts for- 
eign nations, including under this term our own colonies, have 
beconae her debtors, and, in discharge of their obligations ac- 
cruing in the form of profits, interest, and dividends on stock, 
are compelled to send her, year by year, value to a large ex- 
tent for which no payment in return is required. Here we 
find the explanation of the large normal excess of our imports 
over our exports. But an examination of the facts will fur- 
ther evince that this excess is, in the case of Great Britain, 
the indispensable condition of commercial equilibrium; that 
under any other circumstances the present relation of prices 
between her and foreign countries, or, what amounts to the 
same thing, the present proportion in which they exchange 
their products, could not be maintained. This will be evident 
if we consider what would be the consequence of an equali- 
ty of value being established between British imports and ex- 
ports, the financial relations of the country with the rest of 
the world being such as they are. Foreign nations would 
have to pay us, as now, for what we export, and for this, bills 
drawn against the goods they send us, that is, our imports, 
would exactly suffice. But they owe us besides, say a hun- 
dred millions, on account of dividends, interest, and other obli- 
gations. How are they to discharge this latter liability ? It 
is evident they could do so only in one way, namely, by send- 
ing us gold to the value of the amount in question. An ex- 
tensive influx of gold from foreign countries to Great Britain 
would thus set in, and — so long as the state of international 
prices, and therefore of international demand, remained at the 



COMMERCIAL EQUILIBRIUM. 357 

point which had produced the equality of imports and exports 
— would continue. It is plain, however, that international 
prices and demand could not long remain steady under the cir- 
cumstances supposed. The large and continued influx of gold 
into England would necessarily be attended by a rise of prices 
here, and a fall in foreign countries; and this would quickly 
lead to a change in the demand of England and of foreign 
countries for their respective products. England, in possession 
of enlarged monetary resources, and finding prices falling 
abroad, would extend her demand for foreign commodities ; 
while, for precisely opposite reasons, foreign countries would 
curtail their demand for the commodities of England. En- 
glish imports would thus increase, and English exports dimin- 
ish; and this would go on, year by year, so long as gold con- 
tinued to flow. But the question arises at what point would 
the process terminate, and trade find its equilibrium? The 
answer is : precisely when the excess of imports over exports 
had attained its present dimensions — when the former, that is 
to say, had exceeded the latter by a hundred millions sterling; 
for it would only be then that foreign countries could discharge 
all their liabilities to us without remitting gold. Gold would, 
therefore, at this point cease to flow, and prices would remain 
at the level they had reached. In a word, the trade between 
England and the world would once more have attained equi- 
librium. 

And now we are enabled to answer the question propound- 
ed a few pages back. The answer may be formulated thus: 
The state of international demand which results in commercial 
equilibrium is realized when the reciprocal demand of trading 
countries produces such a relation of imports and exports 
among them as enables each country by means of her exports 
to discharge all her foreign liabilities — a position from which 
the following corollary may be deduced, that all payments, due 
from one country to another or to other countries on other ac 



358 INTERNATIONAL VALUES. 

counts than that of imports, of a permanent character — for ex- 
ample, an annual tribute, interest on borrowed capital, divi- 
dends on stock, and so forth — and in excess of similar pay- 
ments due from these latter to the former, will be represented 
in the foreign trade of that country by an excess of exports 
over imports; while, conversely, an excess of payments of this 
character to be received over payments due will find its com- 
mercial expression in an excess of imports over exports. This 
is, in truth, merely to say that the foreign trade of each coun- 
try will adapt itself to the pecuniary requirements of that 
country in relation to the countries with which it trades. If a 
country has been a large borrower of foreign capital, and so is 
indebted to foreign nations in annual interest, or if, again, her 
people are much given to traveling in foreign countries, and so 
have occasion to remit annually large sums abroad for which 
no return is required, under such circumstances her exports 
will tend to exceed her imports ; while, under an opposite state 
of things, that is to say, if a country has been a large foreign 
lender, or if it be the scene of travel for the inhabitants of oth- 
er countries — the imports will tend to exceed the exports. With 
many, indeed with most countries, it will happen that they are 
debtors to foreign countries upon one score and creditors upon 
another ; and the state of the import and export trade will be 
such as the state of the balance in each case may prescribe. 
For example, GTreat Britain makes large remittances abroad 
every year to meet the expenses of Englishmen residing or 
traveling in foreign countries. This would tend to make her 
exports exceed her imports, and would actually produce this 
efifect, if it were not that the debts due on this account to for- 
eign nations are more than balanced by larger debts due on 
other accounts by them to us. The balance of such non-com- 
mercial payments being, on the whole, largely in favor of Great 
Britain, it results, as we have seen, that her imports are, as a 
rule, largely in excess of her exports. An illustration of the 



COMMERCIAL EQUILIBRIUM. 359 

same principle in an opposite sense is afforded by the foreign 
trade of the United States previous to 1860. As all the world 
knows, the people of the United States had long been, as they 
are still, much addicted to foreign travel : they had also for a 
long time been extensive borrowers in European money mar- 
kets. Both these practices combined to place them under the 
necessity of remitting annually large sums to Europe over and 
above what they owed on commercial account; and this obli- 
gation was discharged in the only way, in the long run, pos- 
sible, namely, through the medium of United States products 
exported. Accordingly, if we turn to the Eeports on the ex- 
ternal trade of the United States for the period previous to 
1860, we find, as the normal state of things in that trade, a 
pretty steady excess of exports over imports — an excess which 
in her dealings with Europe assumes very large proportions.* 

§ 6. The foregoing examples show the effects of internation- 
al lending and borrowing on the external trade of nations after 
these practices have issued in monetary relations of a defini- 
tive kind. At the commencement, however, and for so long 
as the process of incurring debt is still in actual operation, the 
effect of such practices on the foreign trade of a country is ex- 
actly the reverse of that which is subsequently realized. The 
nations which have engaged to lend are, during this period, 
those which have pecuniary obligations to discharge ; the na- 

* The total excess of exports over imports on the aggregate external trade of 
the United States in the ten years from 1851 to 1860 (inclusive) was 60,200,000 dol- 
lars, that is to say, an annual average of about 6,020,000 dollars ; but the excess 
of that portion of it which was carried on with Europe was immensely greater. 
The excess of exports over imports, for example, in the trade with Great Britain 
for the single year 1860, amounted to 57,600,000 dollars. This large excess, 
however, was compensated by an excess the other way in her trade with several 
countries, chiefly American, in reference to which she holds much the same posi- 
tion financially which Great Britain holds toward her. (See "Wells's Essay:" 
"Cobden Club Essays," pp. 513 and 515.) 



360 INTERNATIONAL VALUES. 

tions which borrow, those which are entitled to receive pay. 
ments in excess of what is due to them on their ordinary trade; 
and for a time the external trade of both tends to adapt itself 
to this state of things. The subject is perhaps of sufficient im- 
portance to deserve some detailed illustration. 

Let us, then, suppose an industrial colony, starting on its 
career, to become a borrower of capital from its mother-coun- 
try ; and, for simplicity of illustration, we will assume that 
neither is a producer of the precious metals, which, therefore, 
would only pass between them in discharge of pecuniary debts. 
The amount which the mother-country undertakes to lend, and 
the colony to receive, we will set down at one million sterling 
annually. This being the position of affairs, it becomes neces- 
sary that the sum to be lent should be remitted each year from 
the mother-country to the colony, and this, it is manifest, can 
only be done, either by a remittance of gold to the amount re- 
quired, or by an exportation, in addition to that ordinarily 
taking place, of commodities to the same value, or by a com- 
bination of both these methods. If the colony is content to 
take the entire amount, or any portion of it, in commodities, 
this would imply a corresponding increase in colonial imports 
over colonial exports ; for it would only be in the event of the 
increased importation being unbalanced by exports from the 
colony to the mother-country that the proceeds arising from it 
would be available for the mother-country in discharge of the 
loan, and there would obviously be nothing in what had oc- 
curred to lead the latter to increase her demand for colonial 
products. But it is probable that at least a portion of the loan 
would be sent in gold ; and this would operate indirectly to- 
ward the same result. For the flow of gold into the colony 
year by year would necessarily raise colonial prices, while it 
would tend in the opposite direction in the mother-country; 
and this, through a play of forces I have already more than 
once described, would be followed by an increase of colonial 



LENDING AND BORROWING. 361 

importations, and a corresponding decline in the exportation 
of colonial products — a process which would manifestly con- 
tinue, until at length the excess of commodities sent from the 
mother-country to the colony over those received from thence 
would enable the former to pay the whole annual loan by 
means of her commodities alone. At this point the trade be- 
tween them would be in equilihrio; the exportations from the 
mother-country having become sufficient to enable her to dis- 
charge by this means all her liabilities to the colony. Up to 
this stage, then, the effect of foreign borrowing on the colony 
would, so far as we have yet traced it, tend toward an excess 
in her importations from the mother-country over her expor- 
tations thither. This would be the initial effect* But dur- 
ing the continuance of the process just described, the grounds 
of an opposite state of things would be steadily developed. 
With every million sterling annually remitted, the colony 
would become indebted to the mother-country for the interest 
on the amount. Supposing the rate of interest to be five per 
cent, per annum, at the end of the first year the debt of the 
colony to the mother-country would be £50,000 : consequent- 
ly, in making her next remittance on account of capital, the 
mother-country would only need to send value to the amount, 
whether in commodities or gold, of £950,000. In the follow- 
ing year, the colony would owe on account of interest £100,000, 
which, still supposing the same amount of capital to be lent, 
would reduce the liabilities of the mother - country on this 
score to £900,000, and this process of gradual diminution of 
the mother-country's extra commercial liabilities to the colony 
would, at the end of twenty years, issue in this result, that the 
sum due by the colony on account of interest would equal the 

* If the reader desires to verify the soundness of the position thus far, he has 
only to turn to the statistics of the external trade of some of the leading colonies 
of Great Britain, in which the imports will be found steadily and systematically to 
exceed the exports 



362 INTERNATIONAL VALUES. 

entire amount of the annual loan. What would be the effect 
on the external trade of the colony of this growing indebted- 
ness to the mother-country ? Manifestly to neutralize that pro- 
duced by the operation of the influences developed in the ear- 
ly stages of these transactions. The obligation of the mother- 
country to remit value to the colony, in addition to what she 
owed on account of goods imported thence, gave an impulse 
to her export trade, and caused the importations of the colony 
to exceed her exportations. The obligation of the colony to 
discharge its growing liability to the mother-country would 
now, year by year, operate to reduce the excess, until at length 
the liabilities incident to the loans on each side balancing each 
other, the equilibrium of trade would be found in such a rela- 
tion of exports and imports as would balance their remaining ob- 
ligations — on the supposition that these latter should consist ex- 
clusively of commercial debts, then in an equality of imports and 
exports. This state of things, however, would be but momentary. 
We have supposed the colony to have continued borrowing 
at the rate of £1,000,000 sterling annually for twenty years. 
At this stage, let us make the supposition that she suddenly 
ceases to borrow, and observe what, on this hypothesis, would 
be her financial position in relation to the mother-country. In 
the first place, she would be bound to pay £1,000,000 sterling 
annually on account of interest; but, no longer receiving the 
proceeds of the loan as formerly, she could not set off one obli- 
gation against the other. It would, therefore, be necessary for 
her to remit value to the amount required — in other words, 
her position relatively to the mother-country at this stage of 
affairs would be financially identical with that of the mother- 
country toward her at the outset, with this difference, that no 
new indebtedness would be growing up on the side of the 
mother-country to neutralize the permanent obligations incur- 
red by the colony. The financial conditions of the case be- 
ing thus changed, the external commerce of the two countriea 



LENDING AND BOBEOWING. 363 

would adapt itself to the altered state of their reciprocal liabil- 
ities. Gold would once again begin to flow, but the tide would 
this time be directed from the colony to the mother-country, 
and it would be followed by a series of effects similar in char- 
acter, though opposite in direction, to what we have already 
traced. Year by year the exports from the colony to the 
mother-country would exceed its imports thence, until at length 
the excess became sufficient to enable the former to discharge 
its financial liability in the products of its own industry. The 
efflux of gold would at this point cease, and the trade between 
the two countries would be in equilihrio once more. 

We may make yet another supposition. The colony, in- 
stead of suddenly ceasing to borrow at the end of the twentieth 
year, might continue her borrowings on the former scale of 
£1,000,000 annually. On this supposition, her debt to the 
mother-country, on account of interest, at the end of the twen- 
ty-first year would be £1,050,000 ; but £1,000,000 of this could 
now be set off against the annual loan. In other words, the 
net balance due to the mother-country would be £50,000; but, 
on the supposition that the borrowing continued, this balance 
would grow year by year in arithmetical proportion, and would 
act upon her external trade, in proportion to its amount, in the 
manner already shown. In course of time we may assume 
that, as wealth increased in the colony, she would have less 
need of foreign capital, and would borrow less or not at all, 
but she would still be liable to send abroad value in excess of 
her commercial obligations to the amount of the interest due 
on all debts previously incurred. The normal state of the ex- 
ternal trade of the colony would, therefore, under the circum- 
stances supposed, be one in which her exports largely exceed- 
ed her imports; and such it would continue to be until either 
the original debt was paid off, or the colony herself had be- 
come a lender, and by this means imposed a similar tribute 
upon other countries 



364 INTEBNATIONAL VALUES. 

§ 7. Such is the nature of the influences, immediate and re- 
mote, exerted on the external trade of countries by the practice 
of foreign borrowing. In order to render the principle clear, 
it was necessary, in the first place, to exhibit its operation un- 
der very simple conditions ; and I, therefore, had recourse to a 
hypothetical case. But so much, it is hoped, having now been 
accomplished, it may be well to turn from our imaginary moth- 
er-country and colony to an actual instance of international 
lending and borrowing on a vast scale. During the last thir- 
teen years the financial transactions of tbe United States with 
Europe have far exceeded all former examples of the same 
kind, and the effects which they have produced, both on her 
external trade up to the present time, and still more on her 
commercial and financial position with reference to the future, 
have been of a magnitude correspondingly great. As furnish- 
ing, therefore, a striking practical illustration of the principles 
we have been considering, and in particular of the modes in 
which international settlements on a great scale are effected, 
it will, I think, be profitable to consider here in some detail 
the character and scope of those transactions. 

It has been already seen that previous to 1860 the normal 
condition of the external trade of the United States was one 
in which the exports steadily exceeded the imports, this being 
the natural commercial outcome from the state of her finan- 
cial relations with Europe. But the advent of the Civil War 
brought with it a series of events, each of potent influence, and 
which in their combination have sufficed to shake American 
trade to its centre, and to render the financial position of the 
Union in presence of Europe unprecedented and critical in the 
extreme. Of these events the most important were (1), the 
enactment of the Morrill tariff in 1861, by which the United 
States passed from what was substantially a free trade com- 
mercial regime to one of high protection ; (2), the sudden ces* 
sation of cotton cultivation, and, as a consequence of this and 



TRADE OF THE UNITED STATES. 365 

of the Civil War, the temporary collapse of the cotton trade 
with Europe; (3), the creation of an enormous national debt, 
simultaneously with considerable additions made to State and 
other debts previously contracted, a large proportion of the 
funds in both cases being furnished by foreigners; and, lastly, 
the issue of an inconvertible paper currency to take the place 
of the mixed system of coin and convertible credit which 
formerly prevailed. The passing of the Morrill tariff and the 
present rigidly protective system of the United States will be 
the subject of special examination in a future chapter. For 
our present purpose it will be sufficient if we attend to the 
three last of the occurrences named, and mainly to the conse- 
quences involved in the sudden increase in foreign indebted- 
ness, taken in connection with the collapse of the cotton trade. 
Let us first observe the scale on which the new debt was 
created. It amounted — we may say in round numbers — to 
about five hundred millions sterling, of which some two hun- 
dred millions were taken by foreigners.* In addition to this, 
numerous other loans were effected on State, railway, mining, 
and other securities, reaching in the aggregate a very large 
sum, of which the amount that found its way to Europe was, 
according to Mr. Wells, not less than one hundred millions 
sterling. These transactions were spread over several years — 
we may say broadly, over the last three years of the war, and 
the two or three immediately succeeding, Eegarding them as 
they affected the financial relations of Europe and the United 
States, the result may be thus stated: Europe undertook to 
send immediately, that is to say, as fast as the several obliga- 
tions were incurred, some £300,000,000 sterling to the United 
States; while the United States on her side engaged to pay 
the interest on this sum to Europe for all time, or until the 
principal was discharged. The transactions, as I have said, 

* See Wells's Report, 1869. 



366 INTERNATIONAL VALUES. 

were spread over some five or six years, and, making allow- 
ance for the dividends which would be accruing on the invest- 
ments from the time they were effected, and which might be 
used as a set-off against the principal sums still becoming due 
as new investments were made, the amount required to be sent 
from Europe to the United States during the period under re- 
view would not be less than some £40,000,000 sterling annu- 
ally. Under ordinary circumstances — in such a state of ex- 
ternal trade, for example, as had existed previous to 1860 — so 
enormous and sudden an increase of payments from one con- 
tinent to the other could only have been effected through the 
medium of bullion. The ordinary flow of gold from New 
York to Europe would have been suddenly checked, and a 
counter-current would have set in from Europe to New York 
— operations which could not fail to produce a profound fer- 
ment in the money markets of the two continents. As it was, 
however, the settlement of these vast transactions occasioned 
very little disturbance of any kind. The explanation is main- 
ly to be found in another of the circumstances to which I have 
called attention, the collapse of the cotton crop ; for the effect 
of this was suddenly to leave the United States without the 
means of paying Europe for her ordinary importations thence, 
swollen as these had recently been by large purchases of ma- 
terial of war. In the result the United States stood largely a 
debtor to Europe on commercial account; while on financial 
account the balance was not less decidedly against Europe; 
and, the amounts on both sides nearly corresponding, the set- 
tlement of the complex transactions became possible by the 
simple expedient of setting off one class of obligations against 
the other. This, in effect, is what was done. The reciprocal 
obligations of Europe and the United States were thus adjust- 
ed for the time, though by a sort of financial coup de main that 
could not well be repeated ; and now I invite the reader to 
contemplate the state of things which has supervened. 



TEADE OF THE UNITED STATES. 3CT 

§ 8. On the termination of the war the cultivation of cotton 
was, of course, resumed, and already that staple, as an article 
in the trade of the United States with Europe, has attained its 
former proportions, if not in quantity at least in value. On 
her other domestic exports (in which, be it remembered, specie 
is included) there has been an increase, though jiot a large one, 
and only during the last two years. But while this has been 
the case as regards exports, her imports have risen from 
335,200,000 dollars, at which they stood in 1860, the year pre- 
vious to the war, to 617,000,000 dollars, their amount accord- 
ing to the latest returns.* The reader will remember that 
previous to the war the exports of the United States had, as 
a normal state of things, exceeded the imports ; the excess on 
this account during the ten years between 1851 and 1860 (in- 
clusive) having amounted to an average sum of 6,000,000 dol- 
lars annually. Now, however, tlie balance is on the other side. 
It is the imports which are in excess of the exports. In the 

* The following table shows the state of the external trade in the years immedi- 
ately preceding the Civil War, and will enable the reader to compare the import 
and export trade of that time with the import and export trade of the five years 
ending 1872. The earlier figures I have taken from Mr. "Wells's Essay in the 
Cobden Club volume : for the later, I am indebted to the kindness of my friend 
Mr. Horace White, of Chicago : 

Imports (less re-exports). Domestic exports 

(including specie). 

1858 $251,700,000 $293,700,000 

1859 317,800,000 335,800,000 

1860 335,200,000 373,100,000 

1868 351,200,000 352,700,000 

1869 412,200,000 318,000,000 

1870 431,900,000 420,500,000 

1871 613,100,000 513,000,000 

1872 617,600,000 501,100,000 



Annual average) „ , 

oflastSyears}^^''''""'"'" $421,060,000 

ATerage annual excess of imports over exports during last 5 years, $44,140,000. 



368 INTEBNATIONAL VALUES. 

five years, 1868-1872 (inclusive), the excess amounted on an 
average to 44,000,000 dollars annually ; while in the last year 
of the period (1872) it grew to no less a sum than 116,000,000 
dollars. Now, from the explanations already given, the reader 
will understand that such a state of external trade, assuming it 
be sound and normal, would imply a state of financial relations 
between the United States and Europe in which the former 
country was largely a creditor of the latter; for it is only on 
this supposition that a large excess of imports over exports 
could continue consistently with national solvency. So far, 
however, from the facts being in accordance with this supposi- 
tion, they are exactly the reverse of this. The United States 
is largely a debtor to Europe on financial account, while her 
exports are not even sufficient to cover her commercial liabili- 
ties. It will be worth while to consider this position of affairs 
somewhat more in detail. 

As I learn from figures given by Mr. Wells in his Eeport 
for 1868, the dividends due to European holders of United 
States stocks of various kinds amounted in that year to 
80,000,000 dollars. This, however, is but a portion of her ex- 
tra commercial obligations to Europe. Her remittances to for- 
eign countries to meet the expenses of her citizens residing or 
traveling abroad reached in the same year, according to the 
same authority, so large a sum as 25,000,000 dollars, and it 
does not appear that there was any thing exceptional in this 
expenditure. Lastly, we learn from Mr. Wells that an annual 
debt to foreign countries of 24,000,000 dollars more is incur- 
red on account of freights carried in foreign bottoms. The ag- 
gregate of these various sums is 129,000,000 dollars, in round 
numbers we may say about £26,000,000 sterling; and this 
sum the United States has to pay annually to foreign coun- 
tries, over and above what she owes on account of her impor- 
tations. Now, as I have already explained, there is but one 
means by which a nation can in the last resort discharge her 



TRADE OF THE UNITED STATES. SCO 

liabilities to other nations — namely, through the value of her 
products exported. We have seen, however, that the exports 
of the United States, as things now stand, far from being ad- 
equate to the liquidation of her annual aggregate liabilities, 
are insufficient to meet those incurred on commercial account 
alone ; the deficiency, taking the average of the last five 
years, having, as I have just shown, reached the large sum 
of 4^,000,000 dollars — let us say in round numbers about 
£9,000,000 sterling. We have thus a balance of £9,000,000 
on commercial account, plus a further sum of £26,000,000 on 
extra-commercial account — in all £35,000,000 sterling — due, 
year by year, by the United States to foreign countries, in ex- 
cess of what the value of her exported goods enables her to 
discharge. The question arises, How is this liability to be met? 
How it has been met up to the present time I have no means 
of accurately determining; but one expedient, we know, has 
been brought extensively into requisition. During the period 
since the war the sale of American securities in the markets 
of Great Britain and the Continent has been large and increas- 
ing. The United States has ceased, indeed, to add to her pub- 
lic debt, and has even made some progress in reducing it, but it 
is probable that the proportion of this debt in the hands of Eu- 
ropean holders has of late increased, and it is certain that the 
amount of European capital which now finds its way to private 
investment in America is immensely greater than it has ever 
been at any former period. Here, then, is a resource which, so 
far as it goes, and so long as it lasts, the United States may 
employ in liquidation of her uncovered liabilities; the sums 
payable by Europe in purchase of American securities being 
as much available in discharge of American debts as if they 
were obtained in payment of exports.* Whether those sums 

* The mechanism through which these international transactions are carried 
into effect is the Foreign Exchanges. I have not, however, thought it necessary 
to enter into this part of the siihject, as it has been aheady so fully and lucidly 

24 



370 INTERNATIONAL VALUES. 

have hitherto proved sufficient for the purpose required, must, 
for the moment, remain matter for conjecture, but it may be 
confidently asserted that, in any case, they can only be regard- 
ed as a temporary make-shift. No nation can continue to pay 
its foreign debts by the process of incurring new debts to meet 
a balance yearly accruing against it; yet this, in truth, is the 
nature of the financial operation by which of late years the 
United States has contrived to settle accounts with the rest of 
the world. Even on the supposition that European invest- 
ment is to continue on its present scale, the interest upon it 
would, as I have shown, come in time to exceed the principal 
annually invested ; while the balance uncovered by exports 
would still remain absolutely unprovided for. These consid- 
-erations lead me to the conclusion that the present condition 
of the external trade of the United States is essentially abnor- 
mal and temporary. If that country is to continue to discharge 
her liabilities to foreigners, the relation which at present ob- 
tains between exports and imports in her external trade must 
be inverted. Her exports must once again, as previous to 1860, 
be made to exceed her imports, and this by an amount greater 
than the excess of that former time in proportion as her finan- 
cial obligations to foreign countries have in the interval in- 
creased. This, it seems to me, is a result which may be pre- 
dicted with the utmost confidence. The end may be reached 
either by an extension of exportation, or by a curtailment of 
importation, or by combining both these processes, but by one 
means or other reached it will need to be. It is simply the 
condition of her remaining a solvent nation. The people of 
that country may, therefore, if I am right in this speculation, 
look forward to witnessing a result for which the promoters 
of their present commercial policy have often sighed — they 



expounded by Mr. Goschen in his work on the "Foreign Exchanges," to which 
the reader is referred. 



TRADE OF THE UNITED STATES. 371 

may expect, before many years, to see United States com- 
modities selling in foreign countries in vastly greater quanti- 
ties than the commodities of foreign countries in the markets 
of the United States. How far their estimate of this condition 
of their trade will be affected by the circumstance that a large 
proportion of the proceeds from those augmented foreign sales 
will find its way into European pockets, is a point on which it 
would be scarcely becoming in the present writer to offer an 
opinion.* 

The conclusion just stated suggests a further reflection. A 
change in the relation of exports and imports in the trade of 
a country can only be effected through a change in relative 
prices (measured in gold or silver) as they exist in that coun- 
try and in those with which it trades. To establish, therefore, 
an excess of exports over imports in the trade of the United 
States, in lieu of the balance the other way which now exists, 
prices there must be lowered in relation to prices in Europe. 
This may be accomplished partly by an advance in prices 
here not shared by the United States, as in fact has already 
happened in the case of some important commodities; but it 



* In the Times s Philadelphia Conespondent's letter of October 17, 1873, it is 
stated that the imports from the United States had at that time begun to decline, 
the diminution for the first nine months of 1873, as compared with the same pe- 
riod for 1872, having amounted to nearly $35,000,000. On the other hand, it is 
observed that the exports from New York during the same time have increased by 
$32,000,000. The writer goes on to remark : "This decrease in imports and in- 
crease in exports shows a balance of trade in our favor, and explains the decline 
in sterling exchange. The New York Journal of Commerce is jubilant at the 
prospect ; declares that the tide of gold must flow toward America, and announces 
that the balance of trade being in our favor the ' sovereigns of Great Britain must 
melt their pride in the crucibles of the American mint.' " The New York Jour- 
nal of Commerce is overhasty in its conclusions. In its exultation it overlooks 
the circumstance that the favorable balance will be all too small to discharge the 
liabilities of the United States to Europe on account of interest and dividends on 
American securities held on this side. The sovereigns of Great Britain, there- 
fore, will have no need to melt their pride in American crucibles for the present. 



372 INTERNATIONAL VALUES. 

is probable that the end will be reached mainl}'^ through a de- 
cline of prices on the other side. A considerable fall of gen- 
eral prices, however, is a remedy to which manufacturers and 
merchants will only submit when pushed to extremity. It 
will, therefore, only come when credit has been strained to 
the utmost, and a catastrophe is seen to be inevitable ; and 
then it will probably come with a crash. For these reasons 
I should be disposed to look forward to the immediate future 
of American trade as a period of much disturbance and fluctu 
ation, culminating, it is possible, from time to time in commer- 
cial crises.* 

In offering these remarks on the prospective character of the 
external commerce of the United States, I have deliberately 
abstained from adverting to some contingencies, and in partic- 
ular to two, which can not fail, more or less seriously, to affect 
it — I mean the course that country may adopt with regard to 
Protection, as well as with regard to the redemption of her pa- 
per money. I have thus far avoided these topics, because I do 
not conceive that any decision she may come to with reference 
to either— powerfully operative as no doubt it will be on her 
future commercial fortunes in various directions — can possibly 
affect the particular issue to which the preceding remarks have 
been addressed. A persistent policy of Protection will, no 
doubt, have the effect of preventing the due expansion of her 
external trade in the future as it has done in the past, if it does 
not lead to its positive curtailment; while the adoption of free 
trade would as certainly tend to its rapid development, and 
thus greatly relieve the extreme tension of the situation. But, 
under all circumstances, if the United States is to remain a 

* As I write, the news of the commercial crisis in New York (19th September, 
1873) has reached me. Trom the accounts we have yet received it would seem 
to have had its immediate origin in railway speculation ; how far the collapse may 
be connected with the causes to which I have been calling attention, the sequel 
will probably show. 



TRADE OF THE UNITED STATES. 373 

solvent nation, she must contrive to send a larger value out of 
the country than is received into it, and this larger value can 
take no other form than the products of her industry. Free- 
trader or protectionist, therefore, an excess of exports over im- 
ports in her foreign trade, sufficient in amount to discharge her 
international liabilities, is a condition she can not evade. 

I may venture on a further remark. It appears to me that 
the influence, attributed by many able writers in the United 
States to the depreciation of the paper currency as regards its 
effects on the foreign trade of the country, is, in a great degree, 
purely imaginary, founded, as I conceive it to be, upon an erro- 
neous view of the circumstances which determine international 
demand. An advance in the scale of prices, measured in gold, 
in a country, if not shared by other countries, will at once af- 
fect its foreign trade, giving an impulse to importations, and 
checking the exportation of all commodities other than gold. 
A similar effect is very generally attributed by American 
writers to the action on prices of the greenback inconvertible 
currency. But it may be easily shown that this is a complete 
illusion. Foreigners do not send their products to the United 
States to take back greenbacks in exchange. The return which 
they look for is either gold or the commodities of the country ; 
and if these have risen in price in proportion as the paper 
money has been depreciated, how should the advance in paper 
prices constitute an inducement for them to send their goods 
thither? The nominal gain in greenbacks on the importation 
is exactly balanced by the nominal loss when those greenbacks 
come to be converted into gold or commodities. To put the 
argument in a still more practical shape : Whatever the im- 
porting merchant gains in the increased price at which he sells 
his goods, precisely the same amount he looses when he comes 
to purchase a bill by which to remit the proceeds of the sale to 
the country whence the goods came. The nominal premium 
on the bill will just neutralize what he had appeared to gain 



374 INTERNATIONAL VALUES. 

on the sale through the depreciation of the paper money. It 
is true the gain may, in particular cases, exceed the loss, but if 
it does, the loss will also, in other cases, exceed the gain. On 
the whole, and on an average, they can not but be the equiva- 
lents of each other. In making these remarks the reader will 
not understand me as contending that a depreciated currency 
is absolutely without influence on the foreign trade of a coun- 
try. So far as it introduces uncertainty and risk into commer- 
cial transactions it no doubt affects foreign as well as domestic 
trade, and affects both injuriously; but this is an entirely dif- 
ferent thing from acting as an encouragement to importation, 
and a check upon exportation — the effect attributed to a de- 
preciated currency by the writers to whose views I have re° 
ferred. 



CHAPTER IV. 

FREE TRADE AND PROTECTION. 

§ 1. The foregoing discussions have exhibited the conditions 
under which international trade arises, and the nature of the 
advantages that flow from it. It has been seen that nations 
only trade with one another when by doing so they can satisfy 
their desires at smaller sacrifice or cost than by direct pro- 
duction of the commodities which minister to them. The es- 
tablishment of this position is the justification of the doctrine 
of free trade ; since it is manifest that, if nations only engage 
in trade when an advantage arises from their doing so, any in- 
terference with their free action in trading can only have the 
effect of debarring them from an advantage. For those, there- 
fore, who accept the economic theory of international trade, 
no further proof of the essential soundness of this fundamental 
principle of commercial policy is needed. Nevertheless, I am 
unwilling to leave the subject of these chapters without some 
fuller consideration than has yet been given to it of the great 
controversy, not yet, unfortunately, extinct, of Free Trade ver- 
sus Protection. I have said, "not yet extinct: perhaps I should 
rather have said, even now active and glowing with something 
of its pristine fervor; for we have only to turn our eyes to 
France, or to the United States, not to speak of our own col- 
onies, to see with what vigor, and I regret to say with what 
success, the venerable sophism still maintains itself, alike in the 
public press and in national legislatures. Under such circum- 
stances an examination of the specific doctrine of Protection 
will even yet, perhaps, not seem altogether out of date; and, 



376 FREE TRADE AND PROTECTION. 

thanks to Mr. Wells, the United States Commissioner, we are 
not without abundant illustrations of the recent working of 
the principle, which have only to be duly pondered in the light 
of economic theory, to teach a lesson such that he who runs 
may read. 

§ 2. The system of Protection naturally grew out of the sys- 
tem of the Balance of Trade. They were not, indeed, so mucb 
distinct systems as different aspects of the same system. As 
the Balance of Trade doctrine began to give way, that of Pro- 
tection was gradually inserted in its place, as it were to under- 
pin the tottering edifice. The aim of the former was to enrich 
the country by drawing to it the precious metals; that of the 
Jatter to do so by encouraging native industry ; but the means 
adopted were identical, as was also the point of view from 
which the supporters of the two theories regarded commercial 
problems.* Consistently carried out, the Balance of Trade 



* And I may add the criterion by which they tested results. This has been 
quite unequivocally evinced by the recent controversies in France. In a statement 
made before a commission of inquiry, appointed just before the war, M. Pouyer- 
Quertier maintained that French agriculture in a period of twelve years, from 1858 
to 1869, had suffered a loss of 300,000,000 francs. And what was the process of 
reasoning by which he arrived at this conclusion ? Simply this. It appeared that 
during the period in question French imports had exceeded French exports by the 
amount stated, and from this fact M. Pouyer-Quertier drew the inference that 
France was a loser to this amount on her foreign trade. Why he supposes the 
loss to have fallen exclusively on agriculture I do not quite perceive. A reply to 
this statement was made by M. De Kergolay in a speech delivered by him a few 
months since as President of the French Central Agricultural Society. That re- 
ply is perhaps sufficiently conclusive as against M. Pouyer-Quertier, but coming 
as it does from a free-trader certainly does not give one a high idea of the present 
state of economic science in France. M. De Kergolay first objects to the period 
selected by the protectionist advocate for comparison ; he next challenges the cor- 
rectness of the calculations on which the result is based; lastly, he asks what does 
the fact prove. "The importation of products foreign to the soil can not be re- 
garded as a loss to the country. Coffee and cocoa, tea and spices, woods for dye. 



MODIFIED DEMANDS. 377 

Bystem must have extinguished foreign trade, since it is demon- 
strable that the permanently favorable balance which it aimed 
at producing is not capable of realization ; and consistently 
carried out, Protectionism would put an end, if not to all for- 
eign trade, at least to all such as furnished us with commodities 
capable of being produced in the protected country ; for the 
essence of the doctrine is, to encourage native industry by ex- 
cluding the products of foreign industry, wherever these come 
into competition with commodities which native industry can 
produce. Protectionists, however, rarely now attempt to carry 
out their doctrine in its rigor, and, instead of requiring an ab- 
solute exclusion of foreign products, are commonly content to 
demand such a measure of protection as, to borrow their lan- 
guage, shall put the home producer on a footing of equality 
with his foreign rival. If the latter possesses no advantage 
over the former, then the trade, as the phrase goes, "can stand 
alone," and no protective duty is asked for; but if the foreign- 
er possesses an advantage, this must be neutralized by a coun- 
tervailing duty. The reader who has followed the foregoing 
exposition of the grounds of international trade will perceive 
that this more modest form of the doctrine would, in its prac- 
tical issue, be entirely tantamount to the former, since, as was 
there shown, the existence of international trade rests on the 
different productive capacities with respect to particular com- 
modities of different countries: if, therefore, each nation is to 

inj]f or working pui"poses, are not indigenous to the soil of France. Tliey must 
1)6 imported, but how can the necessary cost be set down as a national loss ?" Ap- 
parently, if the imported articles were indigenous, the validity of the protectionist's 
conclusion would be admitted by this champion of free trade. As I have shown 
in the last chapter, the relation of imports to exports is determined by causes quite 
independent of the character of the tariff. Protection will indeed diminish tlie 
aggregate amount of exports and imports taken together, but, whatever be the 
commercial regime, the relation between them will be such as the position of the 
country, taking all her international credits and obligations into account, shall re- 
quue. — See Times, September 18, 1873. 



378 FREE TRADE AND PROTECTION. 

set itself to neutralize this difference, wherever it appears, by 
means of countervailing duties, it is plain that the triumph of 
the system would be the annihilation of foreign trade. If in- 
deed equality in productive conditions could be attained by 
what might be described as a process of " leveling up ;" if 
Protection could contrive that every commodity should be pro- 
duced in every country with the same facility with which it is 
produced on the spot of the globe most suitable to its produc- 
tion — though even so it would annihilate foreign trade — there 
would yet be something to be said for this mode of attain- 
ing equality. It may, however, be doubted if the gain which 
might accrue in material comforts from the increased produc- 
tiveness of the earth would not be more than counterbalanced 
b}'- the intellectual and moral loss which would result from the 
withdrawal of the principal motive to the intercourse of man- 
kind. Protectionists, however, not being able to "level up," 
propose to "level down," and aim at reaching equality by, so 
to speak, handicapping commercial countries against each oth- 
er, making each carry weight in the markets of the others ex- 
actly sufficient to counterpoise its special advantages. Such is 
the theory of trade which now, it seems, finds favor on the oth- 
er side of the Atlantic* In the proposal, however, to sacrifice 
the very ends of industry and commerce in order to promote 
equality, we may, perhaps, detect the savor rather of a French 
than of an American origin. A theory essentially the same 
was propounded a few years ago by M. Alby, in the Revue des 
Deux Mondes, in an essay written with much elaboration and 
parade of scientific precision, and, it must be presumed, with 
skill and effect, since the exposition was accepted by protec- 
tionists in the United States as a triumphant statement of their 
argument, and met with consideration from even free -trade 
journals in that country. Under these circumstances I shall 

* See Mr. Wells's Reports and '£iss&ys passim. 



M. ALBY'S THEORY. 379 

make no apology for devoting a brief space to the considera- 
tion of the protectionist case as stated by M. Alby. 

§ 3. Tiie position taken by M. Alby in bis article in the 
Revue des Deux Mondes^ is, that the doctrine of Protection is 
in theory sound, though he admits that in old countries like 
France it is not possible fairly to carry it into effect. For this 
reason he is in favor of a modified free trade for France in her 
actual circumstances. But, while taking this line as a practi- 
cal politician, he strenuously contends for the theoretic sound- 
ness of the protectionist's view. According to M. Alby, the 
apparent triumph which free-traders commonly gain over their 
opponents arises from the imperfect way in which the protec- 
tionist case is put. Free-traders attack the system in detail, 
joining issue on each particular duty ; whereas the strength of 
the protectionist case lies in its ensemble, in its completeness as 
a whole. 

" Let us take, for instance," says M. Alby, " the case of mining indus- 
try. Every one needs iron, and iron is produced in France by a very re- 
stricted number of furnaces ; and here is the way free-traders put the 
case. ' The price of iron,' say they, ' is raised by the customs' duty on 
foreign iron. Is it just tliat thirty-eight millions of Frenchmen should 
pay more for iron than, in the absence of duty, it is worth, in order to 
enrich a few iron-masters V If we go no further than this — if the case 
remains isolated, only one answer is possible. "With the exception of the 
iron - masters, every one will exclaim, ' No, it is not just, it is an odious 
monopoly !' Very good ; but let us put a similar case for another indus- 
try, the manufacture of cloth. The answer will be the same. Only this 
time the cloth manufacturer will turn round on the iron-master and say, 
' Where is your grievance ? I pay more for your iron than I should 
have to pay for foreign iron if it entered free. Is it not just that you pay 
me a higher price for my cloth than it might be purchased at abroad V 
The argument is unanswerable. The iron-master will be forced to ac- 
knowledge this. As we run successively the entire circle of industrial 

* See the number for 15th October, 1869. 



380 FREE TRADE AND PROTECTION. 

and agricultural production, -with eacli new industry that we take ac- 
count of, the area of the apparent injustice will be continually narrowing 
till we end by finding ourselves in presence of a series of people paying 
dearer for what they purchase, but making others pay dearer for what 
they sell. They have no ground for mutual reproach. Well, such," con- 
tinues M. Alby, " is the system of Protection in its ensemble. It is a sort 
of mutual assurance against foreign competition, an associative pact 
which embraces the entire country. Each consents to pay for all the 
products he requires a price augmented by the customs' tariff, on the 
condition of obtaining for his own products in the home market a price 
equally augmented by the same means, so that they shall return him a 
profit." 

M. Alby apparently overlooks the fact that it is only those 
industries which are carried on under a relative disadvantage 
that stand in need of protection ; and that consequently — since 
in no country are all industries equally favored by nature — 
the consummation he contemplates with so much satisfaction 
is incapable of realization in any part of the world, during any 
stage of commercial progress. How, for example, could the 
wine-growers or silk- weavers of France, or again, how could 
the Western farmers or Southern cotton-planters of the United 
States, be compensated, under M. Alby's system, for the price 
they pay for foreign imports in consequence of a protective 
tariff? By obtaining in return, forsooth, a protective duty, in 
France on wine and silk, and in the United States on w^heat 
and cotton ! But passing by this " little rift within the lute," 
let us, in order to exhibit the radical absurdity of this pretty 
theory, assume that all branches of production in France stand 
equally in need of protection. The argument is, that, provided 
each person receives in his capacity of producer a price for his 
commodity as much higher than its price under free trade as 
that which he pays in his capacity of consumer for what he 
requires, no harm will be done. Accepting this view, a per- 
fect system of Protection might seem to be tantamount simply 
to a general depreciation of money. All persons would re- 



M. A LET'S THEORY. 381 

ceive higher money remuneration than under free trade, and 
would pay this away in higher prices — a consummation, the 
advantage of which to native industry is not apparent. This 
mode of conceiving the case, however, implies a most inade- 
quate appreciation of the consequences involved in M. Alby's 
scheme. M. Alby fails to perceive that the high price which 
Protection secures is rendered necessary in consequence of the 
more onerous conditions under which native industry, tempted 
by its inducements, is encouraged to work. Frenchmen are 
encouraged to produce iron from ores of inferior quality by 
the high price secured to them through their protective tariff. 
In the absence of Protection they would obtain their iron on 
more favorable terms — at a smaller sacrifice of labor and ab- 
stinence — by exchanging for it their wines and silks with En- 
gland. A similar remark applies to every protective duty 
that is really effective for its purpose. It necessarily implies 
production carried on under more onerous conditions. On the 
supposition, therefore, that M. Alby's system were feasible, the 
practical result would be, not simply a general rise of prices, 
but an increase in the cost — cost, be it remembered, in the 
sense not of mere money outlay, but of actual difficulty, of real 
sacrifice — of producing every article the creation of French 
industry. All Frenchmen would be compelled to labor half 
as hard again, and to save half as much again, in order to 
procure every necessary and comfort they enjoy. But then 
equality and justice would be realized. No doubt, just as 
they might be realized by compelling every one to move 
about with a weight attached to his leg. The weight would, 
indeed, be an impediment to locomotion, but provided it were 
in each case exactly proportioned to the strength of the limb 
which drew it, no one, according to M. Alby's way of looking 
at things, would have any reason to complain. No one would 
walk as fast as if his limbs were free, but then his neighbor 
would be equally fettered, and if it took hira twice as long to 



382 FREE TRADE AND PROTECTION. 

reacla his destination as before, he would at least have com- 
panj on his journey. Strange that such speculation should 
find acceptance in the country of Say and BastiatI 

§ 4. Such is the theory of Protection in its most general 
form, as set forth by one of its latest expositors, and accepted 
in the country in which its influence is at present supreme, al- 
most to the degree of absolutely controlling legislation. But 
it will be instructive to enter into the argument in somewhat 
more of detail. As I have said, the position taken in the 
United States is, that Protection is only needed and only asked 
for where American industry is placed under a disadvantage 
as compared with the industry of foreign countries. What, 
then, we have to ask, in the first place, is the criterion by which 
the alleged disadvantage attaching to American indu'stry is es- 
tablished ? As we learn from Mr. Wells,* the criterion taken is 
the cost of production of the articles claiming protection, which 
again, he informs us, is estimated almost exclusively by refer- 
ence to the money price of labor. The rates of wages meas- 
ured in money are higher in the United States than in Europe, 
and therefore, it is argued, the cost of producing commodities 
is higher there than here. It is strange that those who em- 
ploy this argument should not have perceived that it proves 
too much. The high rates of wages in the United States 
are not peculiar to any branch of industry, but are universal 
throughout its whole range. If, therefore, a high rate of wages 

* "In most of tlie tariff discussions that have taken place of late in the United 
States, the question of the necessity and extent of Protection is made to turn al- 
most wholly upoil the difference in the cost [price] of labor employed in domestic 
as compared witli foreign industry — which differences, as already shown, are cer- 
tainly very considerable. And it is also very generally taken for granted in such 
discussions that the nominal rate paid for wages, of itself alone, or at least in .1 
very great degree, determines both the cost of production and the social condition 
and prosperity of the laborer." (Wells's Eeport for 1868, pp. 69, 70.) 



COST OF PRODUCTIOX. 383 

proves a high cost of production, and a high cost of produc- 
tion proves a need for Protection, it follows that the farmers 
of Illinois and the cotton-planters of the Southern States stand 
in as much need of fostering legislation as the cotton-spinners 
of New England or the iron-masters of Pennsylvania! A cri- 
terion which leads to such results must, I think, be regarded 
as sufficiently condemned. The fallacy is, in truth, the same 
as that which so awkwardly marred the pretty theory of M. 
Alby, who, as we saw, in carrying the boon of Protection with 
impartial hand round the whole circle of the industries, unfor- 
tunately overlooked the trifling circumstance that all indus- 
tries are not in each country equally fixvored or disfavored by 
nature, and have not, therefore, equal need of his protecting 
care. If American protectionists are not prepared to demand 
protective duties in favor of the Illinois farmer against the 
competition of his English rival, they are bound to admit ei- 
ther that a high cost of production is not incompatible with ef- 
fective competition, or else that a high rate of wages does not 
prove a high cost of production ; and if this is not so in Illi- 
nois, then I wish to know why the case should be different in 
Pennsylvania or in New England. If a high rate of wages in 
the first of these States be consistent with a low cost of produ- 
cing corn, why may not a high rate of wages in Pennsylvania 
be consistent with a low cost of producing coal and iron? or a 
high rate of wages in New England be consistent with a low 
cost of producing calico ? I must own that Mr. Wells's treat- 
ment of this branch of the argument is, to my mind, eminently 
unsatisftictory. It is true he objects to the protectionist cri- 
terion of cost of production — money wages, but only on the 
ground that it fails to take account of the varying efficiency 
of labor, and of the varying purchasing power of money in re- 
lation to the laborer's requirements.* The flillacy, however, 

* See his Report for 1868, page 70. I must acknowledge, too, that his reply 



384 FEEE TRADE AND PROTECTION. 

involved in that criterion goes far deeper than this, and is 
only fully exposed when exhibited as inverting the real rela- 
tion of facts. As I have already proved,* the rate of wages, 
whether measured in money or in the real remuneration of the 
laborer, affords an approximate criterion of the cost of produc- 
tion, either of money or of the commodities that enter into the 
laborer's real remuneration, hut in a sense the inverse of that in 
which it is understood in the argument under consideration: in 
other words, a high rate of wages indicates not a high but a 
low cost of production for all commodities, measured in which 
the rate of wages is high ; as, on the other hand, a low rate of 
wages indicates a high cost for all, measured in which the rate 
is low. Thus in the United States the rate of wages is high, 
whether measured in gold or in the most important articles of 
the laborer's consumption — a fact which proves that the cost 
of producing gold, as well as that of producing those other com- 
modities, is low in the United States. On the other hand, the 
rates of wages in Europe measured by the same standards are 
— at least as compared with rates in the United States — low, 

founded on these exceptions wholly fails, in my judgment, to meet the protection- 
ist argument. What he shows is that labor in England, though much higher 
priced than in most European countries, and in particular than in Russia, is still 
so much more efficient here than there, that the high Englisli rates are practically 
cheaper for the English capitalist than the lower Continental rates for the capi- 
talist of the Continent. "What is the bearing of this upon the American demand 
for protection against England? Will Mr. Wells maintain that, as the efficiency 
of English labor is to that of Russian, so is the efficiency of American labor to 
that of English ? If not, how does his objection to the protectionist criterion of 
cost, founded on the different degrees of industrial efficiency, affect the argument ? 
And as little does he seem to me to rfiake good the pertinency of his objection on 
the other ground taken. It is possible that in a few manufacturing districts in the 
United States the rent of an artisan's dwelling is higher than in some manufactur- 
ing districts in England, but in the most important articles of the laborer's con- • 
sumption, in the whole list of "provisions," for example, the advantage in respect 
to price is unquestionably with the American consumer. 
* See ante, p. 336, et seq., and pp. 345-347. 



AS MEASURED BY WAGES. 385 

which again merely proves that the cost of producing the com- 
modities constituting those standards is high in Europe, as com- 
pared with their cost in the United States. This elementary 
truth is so far from being generally appreciated that I should 
not be surprised if its simple statement should appear to some 
persons, and possibly even to some economists, as paradoxical.* 
I would ask such to consider what are the true causes of the 
high remuneration of American industry. It will surely be 
admitted that, in the last resort, these resolve themselves into 
the one great fact of its high productive power. Capitalists 
and laborers receive large remuneration in America because 
their industry produces largely. That is the simple and patent 
fact which all must acknowledge. But what is the meaning 
of a highly productive industry, if it be not a liberal industrial 
return as compared with the sacrifice undergone? And what, 
again, does this mean if not a low cost in relation to the thing 
produced ? I must, therefore, contend that the high scale of 
industrial remuneration in America, instead of being evidence 
of a high cost of production in that country, is distinctly evi- 
dence of a low cost of production — of a low cost of production, 
that is to say, in the first place, of gold, and, in the next, of the 
commodities which mainly constitute the real wages of labor — 
a description which embraces at once the most important raw 
materials of industry and the most important articles of general 
consumption. As regards commodities not included in this 
description, the criterion of wages stands in no constant rela- 
tion of any kind to their cost, and is, therefore, simply irrele- 
vant to the point at issue. And now we may see what this 
claim for protection to American industry, founded on the 
high scale of American remuneration, really comes to : it is 
a demand for special legislative aid in consideration of the pos- 

* And yet it ought not to do so. The doctrine was very clearly enunciated 
nearly half a century ago in Mr. Senior's Essay, already frequently referred to, on 
(JDe "Cost of obtaining Money." 

25 



386 FREE TRADE AND PROTECTION. 

session of special industrial facilities — a complaint, in short, 
against the exceptional bounty of nature. 

§ 5. Perhaps I shall here be asked how, if the case be so — ^ 
if the high rate of industrial remuneration in America be only 
evidence of a low cost of production — the fact is to be explain- ■ 
ed, since fact it undoubtedly is, that the people of the United 
States are unable to compete in neutral markets, in the sale 
of certain important wares, with England and other European 
countries. No one will say that the people of New England, 
New York, and Pennsylvania are deficient in any industrial 
qualities possessed by the workmen of any country in the 
world. How happens it, then, that, enjoying industrial ad- 
vantages superior to other countries, they are yet unable to 
hold their own against them in the general markets of com- 
merce? I shall endeavor to meet this objection fairly, and, in 
the first place, let me state what my contention is with regard 
to cost of production in America. I do not contend that it is 
low in the case of all commodities capable of being produced 
in the country, but ox\\j in that of a large, very important, 
but still limited group. With regard to commodities lying 
outside this group, I hold that the rate of wages is simply 
no evidence as to the cost of their production, one way or the 
other. But, secondly, I beg the reader to consider what is 
meant by the alleged "inability" of New England and Penn- 
sylvania to compete, let us sa}', with Manchester and Sheffield 
in the manufacture of calico and cutlery. What it means, and 
what it only can mean, is that they are unable to do so consist- 
ently with obtaining that rate of remuneration on their industry 
which is current in the United States. If only American laborers 
and capitalists would be content with the wages and profits cur- 
rent in Great Britain, there is nothing that I know of to prevent 
them from holding their own in any markets to which Man- 
chester and Sheffield send their wares. And this brings us to 



EUROPEAN COMPETITION. 387 

the heart of the question. Over a large portion of the great 
field of industry the people of the United States enjoy, as 
compared with those of Europe, advantages of a very ex- 
ceptional kind; over the rest the advantage is less decided, 
or they stand on a par with Europeans, or possibly they 
are, in some instances, at a disadvantage. Engaging in the 
branches of industry in which their advantage over Europe 
is great, they reap industrial returns proportionately great; 
and, so long as they confine themselves to these occupations, 
they can compete in neutral markets against all the world, 
and still secure the high rewards accruing from their ex- 
ceptionally rich resources. But the people of the Union 
decline to confine themselves within these liberal bounds. 
They would cover the whole domain of industrial activity, 
and think it hard that they should not reap the same rich 
harvests from every part of the field. They must descend 
into the arena with Sheffield and Manchester, and yet secure 
the rewards of Chicago and St. Louis. They must employ Eu- 
ropean conditions of production, and obtain American results. 
What is this but to quarrel with the laws of nature? These 
laws have assigned to an extensive range of industries carried 
on in the United States a high scale of return, fiir in excess of 
what Europe can command, to a few others a return on a scale 
not exceeding the European proportion. American enterprise 
would engage in all departments alike, and obtain upon all the 
high rewards which nature has assigned only to some. Here 
we find the real meaning of the "inability" of Americans to 
compete with the " pauper labor " of Europe. They can not do 
so, and at the same time secure the American rate of return 
on their work. The inability no doubt exists, but it is one 
created, not by the drawbacks, but by the exceptional advan- 
tages of their position. It is as if a skilled artisan should com- 
plain that he could not compete with the hedger and ditcher. 
Let him only be content with the hedger and ditcher's rate of 



388 FREE TRADE AND PROTECTION. 

pay, and there will be nothing to prevent him from entering 
the lists even against this rival. 

The end here proposed by American enterprise is, it must 
be owned, unattainable under free trade ; for free trade is con- 
tent to turn natural laws to the best account: it does not seek 
to transcend them. But, though unattainable under free trade, 
protectionists assure us that the thing may be done by means 
of their system. It is only necessary, say these authorities, to 
exclude foreign competition by laying high import duties on 
the products in which American superiority over Europe is 
not assured, and the same high returns which attend on Ameri- 
can industry in its most productive fields will — the laws of na- 
ture notwithstanding — be realized throughout its entire range. 
And this is, in fact, the undertaking in which those who guide 
the commercial policy of the Union have been engaged since 
1861. Let us for a moment pause and consider how this bold 
attempt to override the laws of nature has fared. 

§ 6. And here we are confronted at once with the difficul- 
ty of interpreting an industrial experiment. The system of 
American Protection, in its present exaggerated form, may be 
regarded as dating from 1861, when the Morrill tariff became 
law. If all the other conditions of the case had remained sub- 
stantially the same since that time, we might now, by a mere 
inspection of results, pronounce without hesitation on the ef- 
fect of the policy then inaugurated ; but instead of this observe 
how the facts stand. In the same year the great Civil War 
commenced, in the course of which the destruction of human 
life and of wealth in every form probably exceeded any thing 
which' had. before occurred within the same time in the history 
of human affairs. This was soon followed by the creation of' 
an immense national debt, entailing a large permanent increase 
of taxation, and by the issue of an inconvertible paper curren- 
cy, circulating throughout the Union, and affecting alike prices 



A TEN YEABS' EXPERIMENT. 389 

and wages in every brancTi of trade. On the other hand, oc- 
currences of a very different kind marked the course of the pe- 
riod under review. Mineral resources were discovered which 
are now yielding vast wealth, and oil springs which have be- 
come the source of an entirely new and rapidly increasing 
trade. Eailway enterprise, again, during the same time ap- 
pears to have taken on a new activity, while the progress of 
invention in the mechanical arts has never for a moment flag- 
ged. In presence of influences so numerous, so novel, and so 
vast, each affecting industry in its own foshion so powerfully, 
who shall say what portion of what we now find existing can 
properly be attributed to any one of them? The problem, 
in its mere statement, brings into striking relief the utter futil- 
ity of that so-called "inductive method" which some writers 
hold to be the proper one in social and economic inquiries — 
the method, that is to say, which would proceed by drawing 
general conclusions as to the operation of particular causes 
from the summarized results of statistical tables. For, assum- 
ing that we have taken accurate stock of the present industrial 
condition of the United States, as well as of that which was in 
existence previous to 1861, so long as we confine our view to 
the mere statistical aspect of the case, what warrant have we 
for attributing any portion of the change that has taken place 
to one cause rather than to another? Manifestly we have 
none ; nor can we advance a single step toward the solution of 
any problem involved in the facts, till we pass from the mere 
tabulation of results to an examination of the nature and tend- 
encies of the causes in operation. When we have ascertained 
these, and shown by deductive reasoning from them the effects 
they are fitted to produce, we are then for the first time in a, 
position to attempt an interpretation of the varied and com- 
plex phenomena. 

Now this is the vantage ground on which a student of Po- 
litical Economy in dealing with such a problem stands. He 



390 FREE TRADE AND PROTECTION. 

has ascertained the direction in which the various industrial 
forces, operating in the field of the experiment, work ; he 
knows, for example, that in the present instance the destruc- 
tion caused by the Civil War must have left a large gap in 
the then existing wealth of the United States;* but he knows 
also, what is not so obvious, the extraordinary rapidity with 
which countries devastated by war, but in which the indus- 
trial habits of the people have not been broken through, so 
soon as peace and security are restored, recover from the havoc 
which war has made. He knows, again, that the meaning of 
a national debt is the necessity of submitting, so long as it 
remains unpaid, to a known amount of taxation, tantamount 
in its effects to an equivalent deduction from the general earn- 
ings of the community. He knows, further, the consequences 
likely to flow from the issue of an inconvertible currency; 
that, once depreciated below the par of gold, it results in a 
scale of nominal prices, having for its effect to derange the 
monetary relations of the community, to relieve debtors from 
their obligations at the expense of their creditors, and to intro- 
duce much risk and uncertainty into general business, but not, 
as is commonly supposed, to affect in any serious manner the 
external trade of a country.f At the same time, the econo- 
mist can take account of the immense addition made to the 
material resources of the United States, by those mineral and 
other discoveries to which reference has been made, as well as 
by the progress of mechanical invention, the extension of the 

* This, one would think, would be sufficiently obvious, but in arguing with pro- 
tectionists it is diflScult to know what to take for granted. According to the ex- 
treme zealots of the protectionist school the Civil Wai', it seems, is to be regarded 
as among the most potent causes of the I'ecent prosperity of the Union. " The 
conclusion," says Mr. "Wells, "was pointed at by some, and even soberly main- 
tained on the floor of Congress by the advocates of the system of high Protection, 
that the war, regarded from a merely material point of view, was in reality a 
blessing." (" Cobden Club Essays," Second Series, p. 487.) 

t This point has been dealt with ante, p. 373. 



A TEN YEARS' EXPERIMENT. 391 

railway system, and the other industrial improvements which 
have marked recent years. Now these — putting aside for a 
moment the protectionist tariff— are the main and capital oc- 
currences affecting the economic career of the United States 
since 1861; and, in order to judge experimentally of the ac- 
tion of Protectionism on the interests of the country since that 
date, it becomes necessary to effect some rough elimination of 
so much of the general result as may properly be attributed to 
those other causes. In other words, we must endeavor to de- 
termine in what direction, on the whole, has been the net bear- 
ing of their influence; whether in the direction of an abridg- 
ment of the productive power and commercial resources of the 
United States, or in that of their enlargement. For my part, 
I have no hesitation in accepting upon this point what appears 
to be the nearly universal opinion of Americans, that, the pe- 
riod of actual warfare once passed, the influences favoring in- 
dustrial progress have, on the whole, largely preponderated 
over those tending to retard it; and that consequently, if there 
were nothing else in the matter, we should be justified in expect- 
ing, at all events since 1866, a more rapid expansion of Amer- 
ican commerce, and a more liberal return on American indus- 
try, than prevailed in the period previous to 1861. 

Well, how do the facts tally with this reasonable expecta- 
tion? I will allow Mr. Wells to answer this question. In his 
two Eeports to Congress, and in his Cobden Club Essay, he 
has gone very fully and in great detail into the whole subject, 
and those who desire particulars must be referred to those 
writings. It suffices here to state in summary the results of 
his investigations; and these are to the effect that, comparing 
the decade 1860-70 with the previous decade, the commercial 
progress of the United States has, in the later period, suffered 
a serious check ; that the commercial tonnage has during the 
same period positively declined ; that the business of ship- 
building has undergone an almost complete collapse ; that the 



392 FREE TRADE AND PROTECTION. 

rate of increase in the external trade whicli during the de- 
cade 1850-60 had been represented by eighty-one per cent, 
on the trade of the preceding decade, has fallen to one rep- 
resented by nineteen per cent. ; and, lastly, and on this point 
I am content to rest the entire case, that — having regard, on 
the one hand, to the nominal rise in wages reckoned in a 
depreciated currency, and, on the other, to the nominal rise 
of prices measured in the same medium — the real remunera- 
tion of the United States laborer in all the leading depart- 
ments of industry has during the nine years ending 1868 pos- 
itively fallen in a proportion not less than twenty per cent, on 
his previous earnings.* These are singular results to have 
accrued from a still unlimited command of rich virgin soil, 
from enlarged mineral resources, ever progressing mechanical 
invention, and an industrial energy and enterprise which have 
certainly suffered no abatement. To what cause are they to 
be ascribed, and more particularly how are we to account for 
this lowered rate of return upon American industry? It is 
possible the ravages of the war may not even yet have been 
wholly repaired ; the gap made in the national capital may not 
be even now quite filled up. The increased taxation certainly 
remains, and constitutes a deduction, let us say of some five or 
six per centf from American earnings. The depreciated cur- 

* On this point Mr. Wells's conclusion is as follows: while "the aA'erage in- 
crease of all the elements which constitute the food, clothing, and shelter of a 
family has been about seventj'-eight per cent., as compared with the standard 
prices of '60-'61,"the increase which took place during the same time in wages 
was only in the proportion, "for unskilled labor of fifty per cent., for skilled me- 
chanical labor of sixty per cent." .... (Report for 1868, pp. 14, 15.) With- 
out knowing the proportions in which the several enhanced articles enter into the 
laborer's consumption, accurate deductions as to the effect of this change on his 
well-being can not of course be made ; but it is at least certain that the facts stated 
imply a deterioration and a considerable one in his condition. In stating it at 
about twenty per cent, it seems to me that I am well within the mark. 

t The revenue of the United States before the war stood at about £12,000,000' 



A TEN YEARS' EXPERIMENT. 393 

rency lias, no doubt, caused much individual hardship, and in- 
troduced more or less deransrement into commercial affairs. 
But who will say that any of these occurrences, or all of them 
taken together, sufl&ce to account for the facts which Mr. Wells 
has brought to light — the slackened rate of progress, the ar- 
rested commercial growth, and, above all, the diminished re- 
ward for the workman ? The problem, I must own, is for me 
insoluble, until I take account of that one influence which, for 
the moment, I had put aside. I turn to the Morrill tariff, and 
to the aggravations of that code which have since been enacted. 
I find there duties amounting, on an average, to forty-seven 
per cent, ad valorem, imposed on nearly all articles* of any im- 
portance imported into the United States ; on such raw prod- 
ucts as coal, timber, iron, hides, and sugar ; on such manufac- 
tures as clothing in every form, cottons, woolens, and every 
kind of textile fabric, on manufactured iron — in a w^ord, on 
nearly all the raw materials of industry, and many of the most 
important articles of general consumption. And with these 
facts before me, the slackened rate of progress, the arrested 
commercial growth, and the workman's diminished reward be- 
come at once intelligible ; for these are the precise results which 
such a system of protection is fitted to engender. With such 
a barrier as duties amounting to forty-seven per cent, ad va- 
lorem erected against foreign importation, what else could hap- 

its amount since tlie war has fluctuated between £65,000,000 and £70,000,000: 
the increase, therefore, has been, we may say in round numbers, some £55,000,000, 
representing so much of the produce of the land and labor of the country, former- 
ly left with the producers, now taken for the purposes of the State. According to 
Mr. Wells's estimate (Report for 1869, p. xiii.), the value of the total annual pro- 
duction of the United States in 1868 amounted to £1,365,000,000, from which a 
deduction of £55,000,000 would represent a proportion of about four per cent. 
To this there would have to be added the increase of the local taxation of the sev- 
eral States, of which I have no statistics. 

* So nearly so, that if we substitute for "articles paying duty" the entire ini' 
ports, the proportion is only reduced to forty-four per cent. 



394 FREE TRADE AND PROTECTION. 

pea than a retardation of the growth of external trade ? While 
coal, timber, iron are loaded with heavy duties, can ship-build- 
ing be expected to prosper? and, as with ship-building, so with 
some scores of other trades, the details of whose decline will be 
found in Mri Wells's repertory. But I prefer to rest the case 
upon the simple fact of the reduced real wages of the work- 
men ; for here the symptom may be regarded as specific. As 
I have already had occasion to explain, the direct effect of a 
protective duty, when it is really operative, is to compel, on 
the part of the community emplojnng this expedient, a resort to 
more onerous conditions of production for the protected article. 
Every article, therefore, produced in the United States, which 
would not have been produced there but for the protective 
tariff, represents an expenditure of labor and capital greater 
than would have been necessary to obtain the same article had 
it been obtained under free trade. In a word, American labor 
and capital, as a whole, have, effort for effort and outlay for 
outlay, been producing smaller results since 1861 than former- 
ly ; and this being so, what other explanation do we need of 
the actual facts which we encounter — of diminished returns 
on American industry, of a fall in the real wages of labor? 

But, say the protectionists, though measured in products the 
returns on the protected industries may be less, we, by exclud- 
ing foreign competition, secure for the producers a proportion- 
ally higher price ; the effect of which is that, though working 
at a disadvantage, they nevertheless obtain the rate of profit 
current in the country. Let us observe the precise significance 
of this reply. It may be conceded that a small return upon 
industry in the form of products may be compensated to the 
producers by a proportional increase in the price; but then 
it is at the expense of those who pay the increased price ; and 
the question remains, by whom are the higher prices paid in 
the present instance ? There is only one possible answer — by 
the citizens of the United States. In effect these higher prices 



THE POLITICAL ARGUMENT. 395 

are the machinery through which the real rewards of Ameri- 
can industry have been reduced. Consider, for example, the 
case of an Illinois farmer: it is tolerably plain that if, pro- 
ducing corn under the same conditions as previous to 1861, 
and getting for it the same price in foreign markets, he has to 
pay a higher price for every article of his clothing, and for ev- 
ery article into the composition of which coal, timber, iron, or 
hides enter, his real remuneration can not but be considerably 
less than if all these things could be obtained at free-trade 
prices. And the case of the farmer is not isolated : it is that 
of the workers in every department of industry, and exhibits 
unequivocally the net outcome of the protectionist experiment 
which commenced with the passing of the Morrill tariff". Pro- 
tectionists then undertook to secure for the protected interests 
of their country as high industrial rewards as are reaped in the 
most flourishing branches of United States production — and, 
it may be allowed, they have succeeded in their venturous en- 
terprise. But how ? ' Simply by lowering universally the level 
of those rewards ; by enforcing, through the medium of arti- 
ficially enhanced prices, a huge deduction from the income of 
the community at large, and handing over the proceeds to the 
protected trades. Such is the upshot of this notable attempt 
to transcend physical laws, and to secure by legislation what 
nature has denied. 

§ 7. In the foregoing examination of the working of Pro- 
tection in the United States, the argument has been confined 
to what may be considered its purely economic side. It is not 
uncommon, however, to hear the system defended on social 
and political grounds ; and it may, therefore, be well, before 
taking leave of the subject, to make some brief reference to 
this other aspect of the case. For example, the . position is 
sometimes taken that, admitting all that can be urged econom- 
ically in favor of free trade, a nation has yet other interests to 



396 FREE TRADE AND PROTECTION. 

take account of than the production and distribution of wealth; 
it has to consider its moral, social, and political advancement 
— ends to which the working of free trade, it is alleged, is not 
always favorable. For the tendency of free trade, even on the 
showing of its supporters, it is argued, is to turn the industry 
of a nation mainly into a few channels — those channels, name- 
ly, in which it happens to enjoy, in relation to competing na- 
tions, exceptional advantages, so that, in the practical result, the 
nation adopting it is compelled to confine its industry within 
comparatively narrow bounds. Free trade thus tends to cir- 
cumscribe industrial experience; and, by doing so, to interfere 
with that practical education which a nation derives from the 
prosecution of industry. Far better, it is urged, deliberately 
to sacrifice some of the results of material prosperity, if by this 
means we can secure scope for a wider and more diversified 
cultivation, such as is furnished by an industry branching in 
numerous directions and offering to enterprise a varied field. 

I can not deny that there is a certain basis of truth in the 
considerations just stated ; and that circumstances may even 
be imagined in which they would possess real cogency. In- 
deed, the United States themselves at one time presented the 
world with a remarkable example in point. Free trade, as I 
had once occasion to point out, constituted undoubtedly one 
of the main supports of slavery in the South ; for by its means 
Southern slave -masters were enabled, while employing their 
thralls in the few crude industries in which alone their labor 
was efficient, to command all the comforts and luxuries of civ- 
ilized existence. Free trade thus undoubtedly favored, and 
rendered possible, the low state of civilization which up to 1860 
was characteristic of the southern portion of the United States. 
Had that part of the country been dependent exclusively or 
mainly on its own industry for the direct supply of its material 
wants, a greater variety of industrial occupations would have 
been necessary. At the least a considerable portion of the 



THE POLITICAL ARGUMENT. 397 

negro population must have been educated and trained to me- 
chanical pursuits, and a foundation would thus have been laid 
tor social progress. It must be owned, therefore, that the line 
of argument we are considering is not without a certain sup- 
port in the facts of past experience; an admission, however, 
which amounts to no more than this, that barbarism and tyran- 
ny have sometimes gained in strength by availing themselves 
of the expedients of civilization. But the practical question 
is, not whether under extraordinary and exceptional circum- 
stances free trade may be made to serve the purposes of des- 
potism, but whether in a country, such as the United States, 
of great and varied resources, peopled by free men in posses- 
sion of all the most advanced industrial knowledge and trained 
in the usages of civilization — whether in such a country, arti- 
ficial restraint upon the freedom of trade is needed, in order to 
secure for the people that variety of occupations which, it may 
be freely conceded, is favorable to national development. 

And here, in the first place, it must be remembered that the 
capacity possessed by a country of yielding particular elements 
of wealth is never of a uniform character, but exists in general 
in very great variety, according to the fertility, accessibility, or 
other incidents of the natural agents from which such elements 
are derived. As a consequence of this, commodities obtained 
directly from natural agents, that is to say, raw products, are 
raised in all countries at various costs, and as, in conformity 
with the well-known economic principle, it is the cost of the 
most costly portion raised that governs the price of the whole, 
it follows that the actual price at which a commodity of tliis 
description sells, depends not simply on the inherent fertility 
of the sources of supply, but on this taken in connection with 
the total quantity of the commodity produced in the country. 
As the richest and most accessible natural agents are those 
which are first resorted to, the supply, up to a certain point, 
is obtained at the lowest cost at which the country, in the act- 



398 FREE TRADE AND PROTECTION. 

ual state of its industry, can yield it ; but as the requirements 
of the community increase, recourse is had to natural agents 
of inferior capacity, and, as population progresses, to agents 
of capacity inferior still; the cost of production rising with 
each extension of the area of cultivation, and the price with 
the cost of production. ISTow, from this law governing the cost 
of raw products, it results that, however superior one country 
may be to others in its natural capacity of yielding particular 
elements of wealth, it yet rarely happens that these latter are 
not able to encounter its competition in raising even those 
products in respect to which its capacity is greatest, and this 
under the most perfect freedom of trade. Great Britain, for 
example, would be said to have a natural superiority over the 
United States in the production of coal and iron, just as the 
United States would be said to have a natural superiority over 
Great Britain in producing corn ; but in neither case is the 
superiority of a kind to cause the United States, under a per- 
fectly free trade, to give up producing iron and coal, any more 
than to cause Great Britain to give up producing corn. The 
effect of free trade would not be to extinguish any of those 
branches of production in either country, but merely to alter 
the proportions in which they are carried on. Great Britain 
would continue, as she does now, to produce corn so far as it 
was profitable for her to do so, and would satisfy her remain- 
ing requirements by importation, while the United States 
would follow a like course in the case of iron and coal. And 
so also it would be with such products as lumber and leather. 
It may be that Canada has in these products greater resources 
than the United States ; and it is probable that the abolition 
of the high import duties now imposed by the latter country 
would lead to some more or less considerable re-adjustment of 
the proportions in which the industries they occasion are now 
carried on ; but this is a very different thing from the extinc- 
tion of those industries. Probably the utmost that under the 



THE POLITICAL ARGUMENT. 399 

freest tariff would occur is the abandonment in the United 
States of some of the least productive sources of supply, com- 
bined with a corresponding extension of the area of production 
in Canada, while the capital now employed in the United 
States in developing resources which would be better reserved 
for another day would not be slow in finding employment in 
more profitable channels. It is unnecessary to pursue further 
this line of illustration. The same argument, it is evident, 
may be applied in turn to every branch of production employ- 
ed in extracting commodities directly from the store-house of 
nature. Within this circle of industries, at all events, it may 
be confidently asserted that Protection does not maintain in 
the United States a single one which would not exist equally 
under free trade. It is only when her people, not content 
with cultivating their magnificent resources in the degree in 
which nature has endowed them, seek to disturb the natural 
proportion and to push enterprise in certain directions beyond 
the profitable point, that the need arises for artificial support. 
The tendency of Protection, therefore, at least within this par- 
ticular department of industrial activity, is not to create new 
industries, not to diversify industrial pursuits, but to disturb 
the natural development of the country, and to turn capital 
from profitable to unprofitable fields. 

So far, however, the argument applies only to the industries 
of raw produce — as they are called, the "extractive indus- 
tries;" and, it will be urged, that it is especially in manufac- 
tures that scope would be sought for the cultivation of indus- 
trial intelligence and skill. Carried, however, even thus far, I 
may observe, the argument at least suffices to destroy the rai- 
son d^etre, so far as it rests on the ground we are now consid- 
ering, of a large portion of the present tariff of the United 
States, which makes no distinction between raw and manu- 
factured products, but loads alike both classes with heavy du- 
ties. But though the particular considerations that are appli- 



400 FREE TRADE AND PROTECTION. 

cable to the industries of raw produce do not apply to those of 
manufacture, it will not be difficult to show that here also the 
policy of Protection is wholly unnecessary as a means of se- 
curing for a nation that help to its general progress which is 
furnished by variety in its industry. 

At the utmost, it must be remembered, all that Protection 
can do for producers is to secure for them a monopoly of the 
home market. But, in supplying the home market, manufac- 
turers in a country like the United States, or in any new coun- 
try rich in varieties of raw material, have, for a large circle of 
productions, very substantial advantages, even when matched 
against countries of long established and highly organized in- 
dustry such as Grreat Britain. In the first place, most kinds 
of raw material will in the former class of countries be cheap, 
much cheaper for the most part than in old countries — suppos- 
ing, that is to say, that the price is not artificially raised by 
protective tariffs. In the next, the manufacturer is close to 
the source of supply, and is thus saved the cost of transport on 
the raw material, always a considerable item; and, lastly, he is 
also saved the cost of transport, which falls on his foreign com- 
petitor, in sending to market the manufactured article. On all 
these accounts, manufacturers in old countries like those of 
Western Europe lie under heavy disadvantages in competing 
in the home markets of countries like the United States — dis- 
advantages which constitute for the latter countries a sort of 
natural protection, which can not fail to secure for them under 
all circumstances a considerable field for the cultivation of 
manufacturing industry. 

But it will be urged that, the disadvantages in question not- 
withstanding, experience has proved that, over a considerable 
area of manufacturing industry, European manufacturers are 
capable, under free trade, of underselling those of the United 
States even in their own home markets. The fact is undenia- 
ble ; and I can only meet the objection founded on it by ask- 



THE POLITICAL ARGUMENT. 401 

ing tliose who urge it, whether their object is to produce a 
state of things in which foreign nations shall be excluded from 
the markets of the United States in the sale of all commodities 
ivhatever; for if this be their object, its attainment must, let 
them well understand, be tantamount to the extinction of the 
foreign trade of their country. If foreign merchants can find 
a sale for no product whatever, raised in the countries from 
which they come, in United States markets, they are deprived 
of the means by which a trade with that country is permanent- 
ly possible. It must be remembered that the point we are now 
considering is the utility of Protection as a means of helping 
the social and political progress of peoples, and supposing those 
who advocate this view are prepared to go the lengths just de- 
scribed, it comes to this, that their scheme for promoting civ- 
ilization amounts to a plan for putting an end to international 
trade — putting an end to the chief occasion, and main and 
most enduring motive, for the intercourse of mankind! Now 
it must be freely admitted that this mode of advancing human 
interests is not compatible with the maintenance of free trade 
— nay, that it is precisely on the ground of its tendency to pro- 
mote the interchange of commodities among nations that free 
trade claims for itself the credit of being one of the principal 
and most powerful of civilizing agencies. It can not, there- 
fore, be denied that under free trade American manufacturers 
would not improbably have to undergo the patriotic anguish 
of finding themselves undersold in some kinds of goods by 
foreign merchants in their own markets. But there would be 
no need for them, therefore, to despair. It by no means fol- 
lows that the range of their manufacturing industry would 
suffer contraction : it is even exceedingly probable — I am in- 
clined to add, certain — that it would, on the whole, be large- 
ly extended. Particular branches of manufacture now car- 
ried on would probably be brought within narrower limits, 
or might altogether disappear ; but on the other hand, others, 

26 



4G2 FREE TRADE AND PROTECTION. 

now barely existing, would quite certainly take fresh root; 
and in all probability become the staples of a new export 
trade; for, be it well observed, Protection is not less effica- 
cious — I would say, is far more efficacious — to circumscribe 
and crush, than to sustain and encourage. Once recognized as 
governing the policy of a country, every industry which can 
make out a plausible case becomes entitled to its supposed 
benefits, and industries engaged in raising raw material are as 
anxious to be protected as others. Accordingly, in the United 
States, as we have seen, coal, iron, lumber, and leather are all 
loaded with heavy import duties. But what is the conse- 
quence? Just this, that American manufacturers are thus de- 
prived of the advantage they would naturally possess of ob- 
taining their raw material cheap. They are placed at a dis- 
advantage in relation to manufacturers in Europe precisely 
where under free trade their position would be strongest: a 
necessity for Protection is created which could never arise 
under natural conditions of trade: in this way Protection in 
the end becomes its own Nemesis, and the vicious circle is 
complete. 

I have now, I trust, shown that, at all events in such coun- 
tries as the United States, Protection is not needed to secure 
an extensive diversity in the national industries. And when 
we further take account of an influence to which I have not 
yet referred — an influence inseparable from the maintenance 
of a protective system — I think I may even venture to ques- 
tion whether a single industry of importance is kept alive by 
Protection in the United States which would not equally ex* 
ist there in a healthier condition in its absence. I refer now 
to the effect of Protection on the morale of industry. When 
once the industrial classes of a country have been taught to 
look to the legislature to secure them against the competition 
of rivals, they are apt to trust more and more to this support, 
and less and less to their own skill, ingenuity, and economy in 



THE POLITICAL ARGUMENT. 403 

conducting their business. The inevitable result is that indus- 
try becomes unprogressive wherever it is highly protected.* 
It was so in France in the days previous to the commercial 
treaty, and it is so now in the United States, as may be learn- 
ed from Mr. Wells's Reports. " The French manufacturers," 
says M. Chevalier, "if not all, at least a large number of them, 
had, anterior to the treaty of commerce, a serious disadvantage 
— that of old and defective machinery, which augmented the 
cost of production. This was due to prohibition, which pre- 
vented the manufacturers from feeling the spur of foreign 
competition, and dispensed them from the necessity of perfect- 
ing indefinitely, and without delay, their machinery and their 
processes. The treaty of commerce aroused them from this 
apathy as if an alarm-bell had sounded. There was a general 

* This is the conclusive reply to the plea sometimes urged in favor of Protec- 
tion in young communities as supplying a shelter to nascent industries until they 
have struck root and are able to endure foreign competition. We all know the 
passage in which Mr. Mill has given a sanction to Protection when employed 
under such circumstances, and the use that has been made of it in some of our 
colonies. It would have been well at least if those who had relied on this obiter 
dictum of a great writer had taken note of the strict limitations with which he ac- 
companied its utterance. With or without such limitations, however, I can not 
but think that the position is untenable. If Pi'otection tended to develop indus- 
trial virtues, and thus to qualify for independence, one could understand that it 
might be usefully employed for a time under the strict limitations laid down by 
Mr. Mill ; but inasmuch as its tendency is exactly the reverse of this, inasmuch as 
Protection invariably begets a need for Protection, it is not easy to see how its 
adoption could under any circumstances forward the object in view. How little 
those in the United States who have once placed themselves in the leading-strings 
Df Protection are inclined to dispense with these helps may be seen from the fol- 
lowing remark of Mr. Wells: "There has never been an instance in the history 
of the countr)' where the representatives of such [infant] industries, who have en- 
joyed Protection for a long series of years, have been willing to submit to a re- 
duction of the tariff, or have proposed it. But, on the contrary, their demands for 
still higher and higher duties are insatiable and never intermitted." And he pro, 
ceeds to illustrate his remark by some striking examples. ("Cobden Club Es- 
says," Second Series, p. 533.) 



404 FREE TRADE AND PROTECTION. 

renewing of machinery in the numerous factories which were 
badly or imperfectly furnished. Each wished to place himself 
in this respect on a level with England. The treaty of com- 
merce encouraged this renovation by the lowering of duties 
upon every thing which enters into the composition of work- 
shop machinery ; and the Treasury even advanced to a certain 
number of establishments considerable sums, in all 40,000,000 
of francs, or $8,000,000. French industry has drawn from 
this transformation of its machinery {materiel) a new force, of 
which it makes proof every day, and this is a reason why to- 
-day, face to face with foreign competition, it has a confidence 
which it did not know before."* 

To this statement of M. Chevalier's I will only add a single 
example, taken from Mr. Wells's Report: "In the summer of 
1867, while studying the industries of Europe, the Commis- 
sioner visited a factory the products of which had for many 
years found an extensive market in the United States. The 
product being staple, and the industry one that it was exceed- 
ingly desirable should be extended in the United States, the 
Commissioner studied the process of manufacture with great 
care, from the selection of the raw material to the packing of 
the finished product; the rates of wages; the intelligence of 
the operatives, and the hours of labor. When his investiga- 
tion was completed, the Commissioner said to the foreign man- 
ufacturer — a man whose name is a household word in his own 
country for integrity and philanthropy — 'The duty on the im- 
port of these articles into the United States is, respectively, 35 
per cent, ad valorem^ and 30 per cent, ad valorem and 20 cents 
per pound ; if you have given me your prices, products of ma- 
chinery, and cost of labor correctly, I do not well see how you 
could export your fabrics to the United States, even if there 
was substantially no duty, as the advantage of raw material is 

* Quoted from a letter in the New York World, November 28, 1873. 



THE POLITICAL ARGUMENT. 405 

mainly upon our side.' 'I am sometimes at a loss myself to 
account for the course of trade,' was the reply ; ' but perhaps 
it will help you to a conclusion if I tell you that some time 
ago, finding ourselves pressed with German competition, we 
threw out our old machinery, and replaced it with a new and 
improved pattern ; and the machinery by us rejected was sold 
to go to the United States.' To complete the story, it is only 
necessary for the Commissioner to add that the owners of this 
second-hand machinery have since its importation demanded 
and received an increased protection on its products."* 

I may now sum up the general result of this latter portion 
of my argument: (1) As regards the industries of raw prod- 
uce, Protection does not call into existence a single branch of 
production which would not equally have existed under free 
trade ; it merely alters the proportions in which such indus- 
tries are carried on, hindering their natural and healthy devel- 
opment: (2) in the domain of manufacturing industry it is 
equally inefl&cacious as a means of creating variety in industri- 
al pursuits ; for if on the one hand it secures a precarious exist- 
ence for certain kinds of manufactures, on the other, by artifi- 
cially enhancing the price of raw material, it discourages other 
kinds which in its absence would grow and flourish : while (3) 
over and above all these injurious effects, it vitiates the indus- 
trial atmosphere by engendering lethargy, routine, and a reli- 
ance on legislative expedients, to the great discouragement of 
those qualities on which, above all, successful industry mainly 
depends — energy, economy, and enterprise. 

To conclude, having regard to the geographical position, 
extent of territory, and extraordinary natural resources of the 
United States, as well as to the character of its people, trained 
in all the arts of civilization, and distinguished beyond others 
by their eminent mechanical and business talents, there seems 

* Mr. Wells's Report for 1868, p. 74. 



406 FBEE TRADE AND PROTECTION. 

no reason that they should not take a position of commanding 
influence in the world of commerce — a position to which no 
other people on earth could aspire. But, to do this, they must 
eschew the miserable and childish jealousy of foreign competi- 
tion which is now the animating principle of their commercial 
policy. If they desire to command a market for their products 
in all quarters of the world, they must be prepared to admit 
the products of other countries freely to their own markets, 
and must learn to seek the benefits of international trade, not 
in the vain ambition of underselling other countries, and so 
making them pay tribute in gold and silver to the United 
States, but in that which constitutes its proper end and only 
rational purpose — the greater cheapening of commodities and 
the increased abundance and comfort which result to the whole 
family of mankind. 



CHAPTER V. 

ON SOME MINOR TOPICS. 

§ 1. I PROPOSE to devote this concluding chapter on Inter- 
national Trade to the consideration of some topics which seem 
to fall more easily under this than under other headings — 
topics more or less involved, and in general tacitly decided in 
one sense or another, in most commercial and monetary dis- 
cussions, but the current ideas respecting which are by no 
means in accordance with the main principles of international 
trade as these have been developed in the foregoing pages. 

The first of those questions to which I would ask the read- 
er's attention is the following: What is the interest of a coun- 
try in the scale of its general prices? Is it for the advantage 
of the people, as a whole, that the scale should be high or low? 
and, assuming that they have an interest in either alternative, 
what is the nature of the advantage, and what are its limits? 
A moment's reflection will enable us to take at least one step 
toward the solution of our problem : the interest involved^ 
whatever be its character and extent, can only be real so far 
forth as the high or low scale of prices is not universal — so far 
forth, that is to say, as it is not shared in the same degree by 
all countries. A country can have no permanent interest in 
an advance, or in a fall of prices, which embraces the whole 
commercial world. Such a change leaves the purchasing 
power of each country in relation to every other precisely 
where it was before ; reciprocal demand, therefore, would con- 
tinue unaffected, and, by consequence, international values, and 
all interests that depend on that relation. But where the 



408 ON SOME MINOR TOPICS, 

advance or fall is not general — where the high or low scale of 
prices is confined to one, or to a few countries — it is not at 
once apparent how it may affect the interest of those concerned. 
I ought here, perhaps, to refer to a maxim advanced by 
some writers on monetary questions which, if well founded, 
would seem to preclude the existence of the phenomenon, thai 
character of which I propose to discuss. It is held hj the 
writers to whom I refer that the value of gold is, and must 
ever be, "the same all the world over."* Now if this be so, 
as the value of gold is merely another expression for the gold 
prices of commodities, it must follow that a high or a low scale 
of general prices existing in any country, and not shared by 
every other, is an impossible occurrence. As there is no local 
value of gold, so there can be no local scale of prices. I have 
no hesitation, however, in expressing my opinion that the 
doctrine in question, with whatever confidence advanced, is 
absolutely destitute of foundation.f The truth on the subject 

* It is pi'obable that by "the value of gold" the writers in question mean to 
designate its value on loan as well as its exchange value. But a reference to the 
rates of interest prevailing at any given time in the principal money markets of 
the world will suffice at once to refute this part of the doctrine. 

t It has certainly no support from any writer of authority. Eicardo says 
broadly: "The value of money is never the same in any two countries, depend- 
ing as it does on relative taxation, on manufacturing skill, on the advantages of 
climate, natural productions, and many other causes." He adds — and the re- 
mark may possibly help to clear up the confusion of thought in which the maxim 
I am combating has originated — " This higher value of money [in a country ex- 
celling in manufactures] will not be indicated by the exchange ; bills may con- 
tinue to be negotiated at par, although the prices of corn and labor should be 10, 

20, or 30 per cent, higher in one country than in another When each 

country has precisely the quantity of money which it ought to have, money will 
not, indeed, be of the same value in each, for with respect to many commodities 
it may differ 5, 10, or even 20 per cent., but the exchange will be at par. One 
hundred pounds in England, or the silver which is in £100, will purchase a bill 
of £100, or an equal quantity of silver in France, Spain, or Holland." — "Kicar- 
do's Works," pp. 81-84. 



HIGH AND LOW PRICES. 409 

seems to me to be as follows : among countries commercially 
connected there is a large class of commodities — all those, 
namely, which constitute the great staples of commerce, such 
as corn, flour, tea, sugar, metals, and most raw materials of 
industry — of which the prices can not vary much in different 
localities. As a rule the difference of prices will not be great- 
er than the cost of carriage between the countries of produc- 
tion and consumption, always, of course, excepting the case 
where such articles come under the operation of local fiscal 
laws. In the exchange for commodities of this description, the 
value of gold, though not the same all the world over, does 
not greatly vary within the range of general commerce. But 
besides the commodities which form the staples of commerce, 
there are those which, through unsuitableness for distant traf- 
fic, or owing to same other obstacle, do not enter into inter- 
national trade. With regard to these, there is nothing to pre- 
vent the widest divergence in their gold prices, or, therefore, 
in the value of gold in relation to them, not merely in remote 
quarters of the world, but sometimes even in localities within 
the same country ; and the class of goods to which this descrip- 
tion applies — it will vary in extent with the situation of each 
country and the means of communication at its command — for 
from being insignificant, must under all circumstances include 
some of the most important articles of general consumption. 
To perceive this, it is only necessary to remember that the 
group includes the items of house accommodation, meat, and a 
large proportion of those things which fall under the head of 
"provisions" — a list which would have to be greatly enlarged 
if we had to deal with countries lying aside from the leading 
thoroughfares of commerce, or in which the means of commu- 
nication have been imperfectly developed. 

It is not true, therefore, that gold is of the same value "all 
the world over." On the contrary, it varies in value in differ- 
ent countries, and sometimes in different localities within the 



410 ON SOME MINOR TOPICS. 

same country, in some degree in relation to almost aU com- 
modities, but, in relation to a numerous and important class of 
commodities, in a very considerable degree, and this, not mere- 
ly as a temporary fluctuation, but permanently, as a normal 
state of things ; and the problem we have now to consider is, 
whether, the case being so, it is advantageous for the inhabit- 
ants of a country that the scale of its prices, within the possible 
limits of permanent divergence, should be high or low in rela- 
tion to the cosmopolitan level. 

The majority of those who write or speak on commercial 
questions would, I imagine, have little hesitation in pronoun- 
cing in favor of the former alternative; and plainly the most 
obvious appearances support this view. A high scale of prices 
and large accumulated wealth for the most part go together, 
while low prices are the incident of districts remote from the 
main current of civilization, and in general poor and barbar- 
ous. If we inquire, however, as to the nature of the connection 
between the phenomena in each case, the answer does not by 
any means lie upon the surface. Let it be remembered that 
a difference in local prices, if considerable and permanent, can 
only exist in the case of commodities which can not be made 
the subject of foreign commerce. High prices, therefore, can 
not serve us in our dealings with foreign nations, and it is not 
by any means clear how the people of a country can be profit- 
ed by exchanging their goods among themselves on a high 
pecuniary scale. Moreover it is evident that, with regard to 
those commodities which do enter into foreign commerce, it is 
the interest of each competing nation that their prices should 
be relatively as low as possible; this being the condition of 
commanding a sale for them in neutral markets. Granting, 
therefore, that high prices and accumulated wealth on the one 
hand, and low prices and poverty on the other, are generally 
coincident phenomena, we have yet to discover wherein con- 
sists the bond that connects them. 



CHEAP GOLD. 411 

The solution of the problem is contained in the following 
statement : What a nation is interested in is, not in having its 
prices high or low, but in having its gold cheap — understand- 
ing by cheapness* not low value, but loiu cost — a small sacri- 
fice of ease and comfort ; and it generally happens that cheap 
gold is accompanied by a high scale of prices. I say "gener- 
ally happens," because it by no means follows as a necessary 
consequence that the two phenomena should go together. 
Gold may be cheap, and prices, at the same time, low, as a lit- 
tle reflection will easily convince us. The range of prices that 
actually prevails in a country is, speaking broadly, the result- 
ant of two conditions — the cost at which that country produces 
or obtains its gold, and the cost at which it produces or obtains 
commodities. Fluctuations and disturbing causes apart, the 
gold and the commodities will exchange for each other in pro- 
portion to their costs ; and cheap gold, therefore, will be the 
concomitant of high prices, only in so far as the cheapness in- 
cident to the gold is not shared by the other products of in- 
dustry. The cheapness of gold, for example, in Australia does 
not occasion a high price of meat, of flour, of wool, of tallow, 
of hides, or of many other articles in that country, because the 
cost of producing those articles there is also very low. Any 
of them can be purchased in Australia at as low a price as in 
Europe: many of them, meat and wool, for example, at consid- 
erably lower prices. It is thus evident that cheap gold is no 
necessary concomitant of a high scale of prices. We must, 
therefore, distinguish between the two things ; and, so distin- 
guishing, I have now to show that the interest of a nation lies, 

* This is, I admit, a departure from ordinary usage, "cheap" being more com- 
monly applied to price or value than to cost of production. But we much need a 
word to express low cost as distinguished from low price or value, and it seems to 
me that "cheapness" may conveniently be appropriated to this purpose. At all 
events, having had notice of the sense in which I use the word, the reader will not 
be misled. 



412 ON SOME MINOR TOPICS. 

not in having its prices high, but in having its gold cheap; 
and that it is only in so far as high prices are an indication of 
cheap gold, and low prices an indication of dear gold, that ei- 
ther can be considered as furnishing any presumption wheth- 
er in favor of or against the wealth or well-being of a com- 
munity. 

As I remarked just now, the problem we are considering 
can only arise with reference to relative prices. A rise or fall 
of prices shared by all nations equally can not affect the inter- 
est of any ; and similarly the cheapness or dearness of gold — 
considered in the capacity in which we are now regarding it, 
as the instrument of general commerce, not as a commodity 
intended for consumption — is only of importance in so far as 
it is not universal. Gold cheapened everywhere and in the 
same degree, would mean, other things being the same, an 
equal and universal rise of prices, and there would obviously 
be no advantage in obtaining our gold at a lower cost if we 
were compelled to give proportionally more of it for all that 
we required. But assuming — what is simple matter of fact — 
that the cost at which different nations obtain their gold is dif- 
ferent — that the cost may be reduced in some countries with- 
out undergoing a corresponding reduction in others — then a 
manifest advantage arises to a nation from the cheapness of its 
gold; for just in proportion as it obtains its gold at small cost 
— by a small expenditure of labor and abstinence — it will ob- 
tain at small cost all its imported commodities. The advantage 
would, indeed, be confined to its foreign trade. In domestic 
exchanges prices would adapt themselves to the cheapened 
cost of money, and in this field of its activity neither good nor 
evil would result for the nation as a whole ; but in its deal- 
ings with foreign nations it would be otherwise. In relation to 
them, its position, as commanding gold on terms of exception- 
al cheapness, would be one of vantage, and would enable it 
through this cheapened medium to obtain from them, on terms 



CHEAP GOLD. 413 

correspondingly advantageous, all that they are capable of sup- 
plying. 

Such is the nature of the advantage which a country derives 
from the relative cheapness of its gold ; and, as I have already 
remarked, in old countries cheap gold is generally accom- 
panied by a high scale of prices for all commodities not fall- 
ing within the range of international trade. To exhibit the 
grounds of this connection we may take the case of Great 
Britain. The cost of gold is lower in Great Britain than in 
any country in Europe, or, we may say broadly, than in any 
in the world, America and Australia excepted. The evidence 
of this is to be found in the scale of our industrial remunera- 
tion measured in gold.* To what is the fact to be attributed ? 
To this, that we possess in our coal, iron, and other mineral 
fields, combined with the skill and energy of our inhabitants, 
superior resources to those possessed by other countries for 
the production of certain manufactures in extensive demand 
throughout the world. Producing such manufactures at less 
cost than they can be produced at by other nations, and find- 
ing for them an extensive demand throughout the world, we 
are enabled at once to undersell other nations in neutral mar- 
kets, and yet at the same time to obtain for our products a 
price which bears a larger proportion to their cost of produc- 
tion — to the labor and abstinence employed in producing them 
— than the price obtained by foreign nations for their products 
bears to the cost of such products. A given expenditure of 
labor and abstinence in this country thus enables us to com- 
mand a larger result in gold than the same expenditure would 
enable foreign nations to command. In other words, we ob- 
tain our gold cheaper, while, as involved in this result, the 
scale of industrial remuneration, measured in gold, is higher 



* This part of the problem has been ably worked out by Mr. Senior, in his well- 
known Essay, already referred to, "On the Cost of obtaining Money." 



414 ON SOME MINOR TOPICS. 

with us than with them. All this, I say, is the consequence of 
the great and exceptional advantages possessed by this coun- 
try in certain departments of industry. We have here the 
explanation of our cheap gold, but not of our high scale of 
prices.* The explanation of the latter phenomenon lies in the 
fact that those industrial advantages are not general, but con- 
fined to a few departments of production. Supposing that 
they extended over the whole, or the greater portion, of 
our industrial field, our position would resemble that of some 
of the Australian colonies ; and we should, along with cheap 
gold, have a low scale of general prices. In fact, however, the 
case is otherwise. We are in the position of an old country. 
Our land has all long since been appropriated, and, to sup- 
ply us with food, even very inferior qualities of soil have 
been brought under the plow, and are cultivated at high cost. 
Food and provisions of all sorts, consequently, are dear ; so also 
is house accommodation, and in general all those things which 
can not easily be made the subject of international commerce. 
In these respects we enjoy no special advantages over other 
nations : in obtaining gold, however, as has been shown, we do 
possess such advantages. Gold, therefore, with us exchanges 
in larger proportion against all this class of commodities than 
in other countries ; but this is only in other words to say that 
the scale of prices over this area of exchange is higher here 
than in them. High prices, thus, in England are a conse- 
quence of cheap gold ; and our cheap gold enables us to com- 
mand, on terms proportionally favorable, the products of other 
countries. But we should equally enjoy this advantage, while 
we should also enjoy others in addition, if, having our gold as 
cheap as now, our scale of prices was at the same time as low 
as in other countries ; for this would imply that our industry 



* Points which Mr. Senior omitted to discriminate, as Mr. Mill has pointed out. 
See " Principles of Political Economy," vol. ii., p. 157. 



GAIN ON FOREIGN TRADE. 415 

was as productive in all its departments as in those through 
which we obtain our gold. It can not, therefore, be said that 
high prices are in themselves advantageous to a country: 
nevertheless, in so far as they are an indication of cheap gold, 
they are an evidence that the country in which they exist oc- 
cupies a position of vantage in the world of commerce, and 
high prices will therefore, under such circumstances, generally 
be accompanied with commercial prosperity and large accumu- 
lated wealth. There is just one exception to this statement. 
It occurs where the scale of prices is raised through the oper- 
ation of a protective tariff. Gold might, in this case, be cheap, 
and yet none of the advantages of cheap gold would follow ; 
for, as I have explained, it is only through foreign trade that 
those advantages are realized, and just in so far as Protection 
is operative, the country maintaining it will be excluded from 
foreign trade. Countries, therefore, in which prices are kept 
high by Protection, are in the singular position of securing 
cheap gold, subject to the condition that it shall not be spent 
in the only market where advantage would arise from its 
cheapness. 

§ 2. So much I have thought it worth while to say on 
the subject of high and low prices. I now turn to another 
topic, also much implicated in commercial discussions, and on 
which some strange notions would seem to be afloat. That a 
nation is enriched by its foreign trade is mostly taken for 
granted, and with good reason ; but what is the nature of the 
gain? and by what standard are we to measure its amount? 
We are all familiar with the doctrine of the Balance of Trade, 
according to which celebrated theory the gain on foreign trade 
was measured by the excess of exports over imports, and con- 
sisted in the gold and silver which were supposed to come 
from foreign countries in liquidation of the balance. That 
view is now, I suppose, pretty generally abandoned. But I 



416 ON SOME MINOR TOPICS. 

have observed of late, both in the press and among parlia- 
mentary speakers, a curious modern inversion of the ancient 
doctrine. I have seen it laid down, with much exultation over 
the ignorance of our ancestors, that the gain in our foreign 
commerce, instead of being measured, as was formerly thought, 
by the excess of exports over imports, is, on the contrarj'-, meas- 
ured by the excess of imports over exports. A contributor 
to an important provincial paper, writing some time since un- 
der the influence of this notion, calculated that the gain of En- 
gland from her foreign trade amounted to about £100,000,000 
sterling ; this being about the amount by which her imports 
in that year exceeded her exports. If I mistake not, it was a 
part of the doctrine that this sum represented the profits of our 
merchants engaged in foreign trade. The reader who has fol- 
lowed the explanations given in a former chapter of the causes 
governing the relation of exports and imports in the external 
trade of countries will not need any further refutation of this 
extravagant notion. I may just add, as a sufficient reductio ad 
absurdum, that, inasmuch as the external trade of many pros- 
perous communities exhibits a constant excess of exports over 
imports, it would follow from this view that all such communi- 
ties are undergoing a steady course of impoverishment, and 
that those of their inhabitants who engage in foreign trade 
only incur losses on their investments. Such speculations 
show how little the Political Economy of some among us is in 
advance of the ideas of the seventeenth century. 

Another method by which it is frequently attempted to es- 
timate the gain on foreign trade proceeds on the assumption 
that such gain is identical with the mercantile profits accruing 
upon the capital thus invested. This view is only less absurd 
than the former in not identifying the amount of mercantile 
profit with the balance on the external trade. According to it, 
if we suppose the total capital embarked in the foreign trade 
of Great Britain to be £500,000,000, and the rate of profit £10 



GAIN OX FOREIGN TRADE. 417 

per cent, it would follow that the gain to the country upon 
her foreign trade would be represented by £50,000,000 ster- 
ling. This way of regarding the subject is, I imagine, suffi- 
ciently prevalent among our mercantile classes; but it only af- 
fords a proof the more how very little those classes have yet 
contrived to appropriate of the elementary truths of the sci- 
ence in whose name they so often speak. The notion betrays 
a fundamental misconception of the nature, not merely of for- 
eign trade, but of all trade, and of the end and purpose for 
which it exists. "Consumption," says Adam Smith, "is the 
end and purpose of all production." . . . . " The maxim," he 
observes, " is so perfectly self-evident that it would be absurd 
to attempt to prove it." Not less self-evident is it that the end 
and purpose of all trade is to cheapen production, and so to 
minister more effectually to the ultimate end — the need of the 
consumer. But the gain upon trade must surely consist in the 
degree in which it fulfills its proper end — must, therefore, con- 
sist, not in the profits of traders, but in the advantage which it 
brings to those for whose behoof the trader exists. It is true 
the trader's motive when engaging in trade is to make a profit; 
but not the less is his raison d'etre as a trader to minister to the 
wants of others. He must have his profit, or he will cease to 
trade ; but his profit, though an incident of the good resulting 
from his office, is not the measure of it. The measure of the 
service which he renders — of the importance of his function — 
is not this, but the benefit he confers on the community whose 
servant he is; and this benefit is great in proportion to his 
success in serving the consumer; in other words, in cheapening 
commodities — in diminishing the obstacles which exist to the 
satisfaction of human wants. Nothing, therefore, can betray a 
more profound misconception of the true nature of trade and 
the purpose for which it exists than to represent the advan- 
tages derivable from it as measured by the profits of the agents 
who carry it on. It would be just as reasonable to represent 

27 



418 ON SOME MINOR TOPICS. 

the advantages of learning as measured by the salaries of 
teachers. 

What, then, is the true criterion of the gain on foreign trade? 
I reply, the degree in which it cheapens* commodities, and ren- 
ders them more abundant. Foreign trade not merely supplies 
us with commodities more cheaply than we could produce 
them from our own resources, but supplies us with many com- 
modities which, without it, we could not obtain at all. The de- 
gree in which it does this is the true criterion and measure of 
the gain, but it is a measure which palpably does not admit of 
being applied in practice. To determine the amount or extent 
of the advantage derivable from foreign trade is, and, I venture 
to say, must ever be, an absolutely insoluble problem — a truth 
which will be sufficiently apparent if we advert to some of the 
data on which its solution depends. 

As I have just said, one portion of the gain derived from 
foreign trade consists in the supply it yields us of commodities 
not capable of being produced in our own country. Great 
Britain, for example, obtains in this way her tea and sugar; 
and it will, perhaps, be thought that the satisfaction derived 
from the consumption of these articles constitutes the gain to 
the British consumer upon so much of our foreign trade. 
Even if this were so, it is pretty evident that the satisfaction 
in question is not capable of quantitative measurement. But, 
in point of fact, the problem is far more complicated than such 
a solution supposes; for it must not be forgotten that, in the 
event of our being excluded from the countries which furnish 
ns with tea and sugar, we should have at our disposal all the 
capital now employed in producing the commodities in ex- 
change for which tea and sugar are now obtained. This capi- 
tal would then be available for the production of substitutes, 

* The reader will bear in mind the sense in which I use "cheapen" — viz., as 
equivalent to lowering cost, to reducing the sacrifices involved in procuring a com- 
modity. 



GAIX OX FOREIGN TRADE. 419 

or, in case none were forthcoming, for the production of other 
things; and the gain upon this portion of our foreign trade 
would be represented by the difference between the advantage 
conferred on the community by its present supply of tea and 
sugar, and that which it would receive from the substitutes, or 
other things, whatever these might be, which, in their absence, 
we might produce from our own resources. But, as we have 
no means of measuring accurately the satisfactions which we 
at present enjoy from the consumption of the articles in ques- 
tion, and still less of measuring those which we might derive 
from such things as in their absence we might provide our- 
selves with, it is evident that an accurate, or even an approxi- 
mate, determination of the advantages accruing to us from our 
foreign commerce, so far at least as its function is to furnish us 
with articles we can not ourselves produce, is absolutely be- 
yond our reach. All we can say with confidence is that the 
tastes and wants which are now satisfied through this service 
of foreign commerce are of a more imperious kind than any 
which our labor and capital, employed upon the materials fur- 
nished to us by our own country, are capable of satisfying; 
since, if it were not so, so much of our foreign trade as it rep- 
resents would not exist. We are thus justified in concluding 
that there is a real gain, but beyond this our data do not car- 
ry us. We are absolutely without the means of estimating its 
amount. 

So much for one portion of our foreign trade. With regard 
to that more important part of it, of which the function is, 
not to supply us with commodities which we are incapable of 
producing, but to cheapen those which we might produce, the 
case might here seem to be more manageable. In order to as- 
certain the gain on this part of our trade, the data necessary 
would be, first, a determination of the cost at which we actual- 
ly obtain our imported articles of the class under consideration ; 
and, secondly, a determination of that at which we could pro- 



420 ON SOME MINOR TOPICS. 

duce them if thrown upon our owiv resources. The difference 
would represent what we gain by importation, and the data 
might seem to be not beyond our reach. When, however, we 
come to look closely at the problem, we find ourselves once 
more estopped by insuperable difficulties ; for, to take a sim- 
ple illustration — on the supposition that we import from for- 
eign countries 10,000,000 quarters of wheat, how are we to 
estimate the gain which the nation derives from obtaining so 
much of its food in this way ? We know, indeed, or we may 
ascertain, at least approximately, the cost in labor and absti- 
nence of the 10,000,000 quarters of wheat which we import. 
It would be represented by the cost of the commodities which 
we export to pay for them. We know again, or we may as- 
certain, the cost at which wheat is now raised in this country, 
when grown under conditions which determine its average 
selling price. But what we do not know, and what we have 
no possible means of ascertaining, is the cost at which an addi- 
tion of 10,000,000 quarters to our present home supply could 
be produced from the soil of Great Britain. Inasmuch as, in 
order to produce this quantity, it would be necessary to bring- 
under cultivation for wheat soils far inferior to any now de- 
voted to that purpose, we may be quite confident that the cost 
would be immensely greater than any portion of our home 
supply is now raised at; immensely greater, therefore,* than 
that at which we obtain the quantity now imported ; but by 
how much greater we are absolutely without the means of de- 
termining — I might almost say, of conjecturing ; and it is evi- 
dent that the same argument applies with equal force to every 
article of raw produce that we import. It follows that, with 
regard to commodities capable of being produced in the coun- 

* Home and imported wheat, quality for quality, selling in the same market at 
the same price, and the average price of home wheat being governed by the cost 
of producing the most costly portion, it follows that this cost will represent to us 
the cost of the imported portion of our wheat supply. 



GAIN ON FOREIGN TRADE. 421 

try, no less than with regard to those which can only be ob- 
tained from foreign sources, the data for ascertaining the quan- 
tum of gain accruing to us from foreign trade are absolutely 
wanting. We know the nature of the gain : it consists in ex- 
tending the range of our satisfactions, and in cheapening the 
cost at which such as in its absence would not be beyond our 
reach are obtained ; and we know that the amount which it 
brings to us under each of these categories can not but be very 
great; but beyond this indefinite and vagae result our data do 
not enable us to pass. 



THE END, 



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